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Inside Ardian’s new sustainability methodology

Ardian is redesigning its approach to buyout investing through a new sustainability measurement methodology.

This week, Ardian launched a new Sustainability Measurement Methodology that seeks to quantify not just the impact of a portfolio company, but also the true reach of its sustainability efforts.

In a nutshell, the methodology measures and monitors its portfolio companies’ impact on society from acquisition to exit, with impact scores at portfolio-company level and fund level. It applies to any company, whatever its industry, size, geography or maturity.

Ardian’s previous methodology used to measure the ESG performance of its investments with a strong focus on operations and sectoral benchmarks.

The new methodology uses the UN Sustainable Development Goals as the overarching framework as well as the Impact Management Project, a forum for organisations to build consensus on how to measure, compare and report impacts on environmental and social issues, and the Theory of Change, a logic framework to manage impact. It was developed alongside ESG advisor INDEFI and Ashoka, a network of social entrepreneurs.

The firm has been structuring its sustainability efforts for more than a decade, beginning in 2008 when founder Dominique Senequier implemented a profit-sharing policy across the firm. In 2012, it incorporated an ESG section in its funds’ management reports, and in 2015 made moves on climate change and diversity.

According to Candice Brenet, head of sustainability and managing director at Ardian, the firm first mapped out the impact of its buyout portfolio companies using the SDGs in 2018. The sustainability team started using the new methodology last year across 16 companies in the buyout portfolio. This was refined and expanded to 20 companies this year and extended to the expansion portfolio, which had 15 investments.

Ardian realised there were limitations in the earlier sustainability assessment, Brenet said.

Brenet: crisis has highlighted sustainability issues

“We observed that our previous ESG assessment did not reflect the full impact of our investments with some of our portfolio companies exhibiting good ESG performance despite material impact on the environment. Meanwhile, some companies provide essential services to society, but they are less mature and had a lower ESG score.”

To address this, the new methodology combines an absolute score capturing real impact – ranging from zero (negative impact) to 100 (positive impact) – with a relative score quantifying the sustainable performance within the industry.

Another layer of assessment quantifies the impact of the portfolio company on each part of the value chain – from supply chain to operations, and products and services.

An example is food company Solina Group, which Ardian acquired in 2016. Solina’s supply chain, which includes its raw material producers and suppliers, was the firm’s first focus during the assessment, followed by health and safety across its operations and facilities.

The primary goal of the methodology is to support the monitoring and transformation of  Ardian’s existing portfolio. The firm’s long-term aim is to use the new assessment for all companies entering the portfolio, said Brenet.

“While we anticipate and observe it will affect the pre-acquisition analysis, it is too early to speak about the potential developments of the tool in the pre-acquisition phase.”

Using the framework in the due diligence process could also be more complicated because Ardian may not necessarily have access to granular information on potential acquisitions, she added.

Ardian has managed $12 billion across 80 investments for its buyouts portfolio and $3.5 billion for the latest generation of its expansion portfolio.

She noted that the new methodology was also driven by LPs’ questions on how Ardian’s portfolio contributes to SDGs.

“That was part of our objective when developing the methodology and has nurtured our assessment output. The SDGs have certainly had more influence in the investment industry,” she said.

How has the pandemic affected the firm’s sustainability initiatives?

Brenet noted that when the covid-19 crisis started, the sustainability team had some questions and fears about the ability to continue and drive the programme.

Emergencies including sustaining operations and keeping people employed could detract management from the sustainability agenda. In fact, Brenet said her team had to delay some initiatives for such companies.

“Eventually what we observed is that management teams generally wanted to work on sustainability issues,” said Brenet. The crisis has also highlighted that business resilience relies on their capacity to address sustainability issues such as supply chain, health and safety as well as flexibility in work organisations, she added.

The industry’s commitment to ESG and the impact of the virus is going to be significant in the long term. A recent survey from bfinance found 42 percent of investors say ESG issues will become more important because of covid-19 and its impact on economies, while no investors expect they will become less important. In addition, a substantial minority said the crisis will affect the way in which they implement ESG considerations.

“There are some changes that require a decade or more to materialise so we will not see all the benefits of the work we do. But at least we empower the companies to drive this impact and hope that the next owners will continue to support them.”