V O LU ME 3 1
N U MB ER 2
S P R IN G 2 0 1 9
Journal of
APPLIED
CORPORATE FINANCE
I N THIS I SSU E:
Sustainable
Financial
Management
8
A Fireside Chat with Raj Gupta: What It Takes to
Create Long-Term Value
An Interview with Raj Gupta, Chairman, Aptiv Plc and Avantor, Inc.
15
Aptiv Becoming a More Sustainable Business
22
The Economic Significance of Long-Term Plans
34
Private Equity 4.0: Using ESG to Create More Value with Less Risk
42
ESG as a Value-Creation Tool for Active Investors:
A Profile of Inherent Group
Kevin P. Clark, President and CEO, Aptiv Plc
Sakis Kotsantonis, Christina Rehnberg, and Bronagh Ward, KKS Advisors; George Serafeim,
Harvard Business School; and Brian Tomlinson, CECP Strategic Investor Initiative
Reynir Indahl and Hannah Gunvor Jacobsen, Summa Equity
Tony Davis, CEO/CIO, and Beau Lescott, PM, Inherent Group
50
Four Things No One Will Tell You About ESG Data
59
Social Capital, Trust, and Corporate Performance:
How CSR Helped Companies During the Financial Crisis
(and Why It Can Keep Helping Them)
Sakis Kotsantonis, KKS Advisors, and George Serafeim, Harvard Business School
Karl V. Lins, University of Utah; Henri Servaes, London Business School, CEPR, and ECGI;
and Ane Tamayo, London School of Economics
72
Innovation in Stock Exchanges: Driving ESG Disclosure and Performance
80
How Board Oversight Can Drive Climate and Sustainability Performance
86
Sustainability and Capital Markets—Are We There Yet?
92
An Investor Perspective on the Black Box of Corporate Social Responsibility
Tania Bizoumi, Socrates Lazaridis and Natassa Stamou, Athens Exchange Group
Veena Ramani, Ceres, and Bronagh Ward, KKS Advisors
Chris Pinney, High Meadows Institute, Sophie Lawrence and Stephanie Lau, KKS Advisors
Chitru S. Fernando, University of Oklahoma, Vahap B. Uysal, DePaul University,
and Amal P. Abeysekera, University of Oklahoma
105 ESG, Material Credit Events, and Credit Risk
Witold J. Henisz and James McGlinch, University of Pennsylvania
118 Climate Change Scenario Analysis for Public Market Investors
Casey Clark, Rockefeller Capital Management
Private Equity 4.0: Using ESG to Create
More Value with Less Risk
by Reynir Indahl and Hannah Gunvor Jacobsen, Summa Equity
T
he private equity industry is evolving. When the 1980s gave birth to the first
wave of leveraged buyouts, PE firms created value primarily through financial
engineering. This involved the use of high leverage in combination with large equity stakes
to motivate managers charged mainly with taking costs out of mature businesses.
Then, in the 1990s, PE 2.0 was focused heavily on increasing operating efficiencies,
accomplished often by bringing in proven CEOs from successful public companies.
Starting in the 2000s, PE 3.0 saw the building of large financial institutions that continued
to function as value-adding buyers, while responding to tough competition from both
strategic and financial buyers by expanding into different asset classes and developing new
areas of expertise.
Today, in a movement that might be called Private Equity 4.0,
a growing number of PE firms have been adding to their existing capabilities the effective management of “externalities” and
environmental, social, and governance (ESG) factors. In this
article, we focus on how one such firm—our firm, Summa
Equity—has turned its ESG principles and practices into a
core competence, a source of competitive advantage that has
enabled the firm to distinguish itself from its competitors and,
in so doing, to bring about significant increases in efficiency
and long-run value.
Externalities Reaching an Inflection Point?
To what extent do “externalities,” such as the social costs
associated with climate change and rising levels of inequality, affect corporate financial performance and value? While
the evidence so far is ambiguous, our investment strategy at
Summa Equity is based on the premise of an increasingly
positive correlation between companies’ profitability and
market values, and their effectiveness in mitigating “externalities”—that is, the environmental and other social costs
or benefits that arise from their business activities. We believe
that investors that fail to recognize this correlation will fail to
34
Journal of Applied Corporate Finance • Volume 31 Number 2
see the risks of negative externalities reducing the demand for
a company’s products or services. Such risks may also reduce
its ability to attract talent, resulting in a potentially significant
loss of its earnings power and market value. At the same time,
many of these investors will also fail to see the value creation
opportunities in providing solutions to the challenges arising from these negative externalities. Consider, for example,
the significant growth opportunities in fields such as health
care, education, and renewable energy—and in reducing the
mountain of waste and plastic pollution—all investments
that are expected to have positive social and environmental consequences on top of and quite apart from the profits
and returns they’re expected to generate. In fact, the growth
opportunities in such areas may well be large enough to create
virtuous cycles that end up leading to much broader increases
in employment and economic growth.
The private equity firms that successfully incorporate
these ESG risks and opportunities into their investment
strategy and value creation approach are likely to improve
their returns while at the same time reducing their vulnerability to risk. And this, in short, is the essence of the PE
4.0 investment model.
Spring 2019
The Challenges
To be sure, the current investment environment now appears
to be as volatile and uncertain as at any time since World War
II. In each successive decade, global economic growth seems
to have slowed somewhat, especially in Europe and the U.S.1
Across the globe, national debt-to-GDP ratios and financial
assets-to-GDP ratios have increased substantially, even after
the global financial crisis in which such debt and assets played
a major role.2 Adding to these economic risks, weather volatility likely attributable to climate change3 is increasingly seen
as a cause in natural disasters.4 Furthermore, the effects of
CO2 emissions on the ocean and temperatures could disrupt
sectors affected by climate volatility and increased sea level.
The biosphere is also under threat, where we are now said to
consume resources at a level 70% above the planet’s perceived
limits,5 and where the ecosystems providing nutrition to a
growing population are believed to be so overburdened as
to be losing their long-term carrying capacity.6 Digitization
and Artificial Intelligence are rapidly changing and disrupting
industries and workforces,7 which in turn is likely to increase
inequality and reduce trust in public as well as private institutions to the point where such inequality and lack of trust
threaten the globalization of the world economy. As a result,
we are seeing riots and rapidly changing demand for foreign
mass consumer products, and distrust in democratic institu1 Gordon, Robert J., The Rise and Fall of American Growth, (Princeton University
Press, 2016).
2 Lund, Susan, James Manyika, Asheet Mehta, Diana Goldshtein, “A Decade After
the Global Financial Crisis: What Has (and Hasn’t) Changed?,” McKinsey Global Institute
Briefing Note (September 2018).
3 Allen, M., O. P. Dube, W. Solecki, F. Aragón–Durand, W. Cramer, S. Humphreys,
M. Kainuma, J. Kala, N. Mahowald, Y. Mulugetta, R. Perez, M. Wairiu, K. Zickfeld,
“Framing and Context,” in: “Global warming of 1.5°C. An IPCC Special Report on the
impacts of global warming of 1.5°C above pre-industrial levels and related global greenhouse gas emission pathways, in the context of strengthening the global response to the
threat of climate change, sustainable development, and efforts to eradicate poverty” [V.
Masson-Delmotte, P. Zhai, H. O. Pörtner, D. Roberts, J. Skea, P.R. Shukla, A. Pirani, W.
Moufouma-Okia, C. Péan, R. Pidcock, S. Connors, J. B. R. Matthews, Y. Chen, X. Zhou,
M. I. Gomis, E. Lonnoy, T. Maycock, M. Tignor, T. Waterfield (eds.)]. (IPCC, 2018). In
Press.
4 Wall Street Journal, January 19, 2019. “PG&E: The First Climate-Change Bankruptcy, Probably Not the Last.” [online] URL: https://www.wsj.com/articles/pg-e-wildfires-and-the-first-climate-change-bankruptcy-11547820006. [Accessed March 9,
2019].
5 Global Footprint Network. “World Footprint” (2019). [online] URL: https://www.
footprintnetwork.org/our-work/ecological-footprint/ [Accessed March 8, 2019].
6 Rockström, J., W. Steffen, K. Noone, Å. Persson, F. S. Chapin, III, E. Lambin, T.
M. Lenton, M. Scheffer, C. Folke, H. Schellnhuber, B. Nykvist, C. A. De Wit, T. Hughes,
S. van der Leeuw, H. Rodhe, S. Sörlin, P. K. Snyder, R. Costanza, U. Svedin, M. Falkenmark, L. Karlberg, R. W. Corell, V. J. Fabry, J. Hansen, B. Walker, D. Liverman, K.
Richardson, P. Crutzen, and J. Foley, “Planetary boundaries: exploring the safe operating
space for humanity,” Ecology and Society, Vol. 14, No. 2 (2009), Art. 32. [online] URL:
http://www.ecologyandsociety.org/vol14/iss2/art32/. [Accessed March 9, 2019].
7 Forbes, July 7, 2018. “Think You Know How Disruptive Artificial Intelligence Is?
Think Again.” [online] URL: https://www.forbes.com/sites/jasonbloomberg/2018/07/07/
think-you-know-how-disruptive-artificial-intelligence-is-think-again/#3a9087f83c90.
[Accessed March 10, 2019].
Journal of Applied Corporate Finance • Volume 31 Number 2
tions. The U.S. hegemony that has long provided geopolitical
stability is threatened by the deteriorating relationships of
China and Russia. On top of all these challenges, the world’s
population is expected to grow from seven to 10 billion in the
next 30 years, which will require a significant increase in infrastructure and agricultural and resources output.8
It is highly unlikely that we can continue to fuel global
growth and a steady increase in global prosperity through
further exhaustion of the planet’s resources, failure to
address the significant rise in inequalities, and the continued
ignorance (or indifference) of the electorate to the unwillingness of our elected officials to deal with the root causes of
these problems. It is also unlikely that multiple disruptions
will continue in such a smooth fashion as we have seen in the
post-war period. While there has historically been little risk
or reward for companies or their investors associated with
taking an “agnostic” position on the social and environmental
“
Summa’s investment strategy is based on the view that
our biggest challenges are also our biggest investment
opportunities, given that the demand for solutions to
these challenges is growing.
”
consequences of externalities, the high level of negative externalities and the inflection point we now seem to have reached
have significantly changed the risk-reward consequences of
continuing to avoid action. All of which is to say: What got
us here will not get us there, and those who understand this,
and navigate accordingly in the bumpy ride ahead, will be
the winners.
Summa’s Investment Strategy:
Challenges as Opportunities
Summa’s investment strategy is based on the view that our
biggest challenges are also our biggest investment opportunities, given that the demand for solutions to these challenges
is growing. And the reality of comparative advantage suggests
that the financial markets and the businesses they choose to
fund are the best bet to provide these solutions, while operating within constructive regulatory frameworks provided by
8 Grantham, Jeremy, “Dealing with Climate Change: The Race of Our Lives,”
(March 1, 2018). [online] URL: https://ie.unc.edu/files/2018/03/JG_UNC_Ten_3-1-18.
pdf. [Accessed March 9, 2019].
Spring 2019
35
governments. Though we as investors are confronted with an
uncertain world, there are a number of things we can profess
to know, with a very high degree of confidence:
• The population on earth will increase from seven to
nearly 10 billion by 2050. This rapid growth is straining our
resources, but creating opportunities and growth in areas such
as recycling and agri-tech.
• We are living longer, thereby creating growth in the
health care sector and infrastructure.
• People are moving because of urbanization (and sheer
unrest), which is providing investment opportunities within
education, security, public services, real estate, and infrastructure.
• Humans are influencing the climate system, creating a
need to reduce carbon emissions, improve energy efficiency,
and promote renewable energy consumption. This means that
energy-efficient technologies, energy infrastructure solutions,
and the urban sharing economy are all providing attractive
investment opportunities.
• While technology is disrupting many of the old industries, it is also providing the tools needed to solve some of our
major challenges. Digitization, Big Data, and social media
are also providing a transparency revolution that dramatically
increases the risks of being exposed to ESG issues.
In sum, to the extent these megatrends are causing
challenges and concerns, they are also providing some large
and attractive investment opportunities. And thus although
there are significant headwinds in the general economy and
major sectors of the economy, the megatrends are providing
tailwinds in the sectors creating solutions to the challenges.
In response to these megatrends, we at Summa are investing within three main “themes”: resource efficiency, changing
demographics, and tech-enablers. Within each of these areas,
we have identified and committed our limited partners’ capital
to companies operating in established industries that include
waste management and recycling, aquaculture, education,
health care, and security, as well as relatively new areas called
“agri-tech,” “regtech,” and “fintech.”
Winners Will Have to Compete in a World Where
Externalities Now Matter
All companies have employees, customers, suppliers, and
financiers, and all companies are regulated—and so they must
compete for and satisfy the needs of all these groups while also
complying with regulation.
There is growing evidence that disciplined strategies that
call for investments in addressing environmental and social
issues have positive effects on corporate competitiveness,
operating performance, and long-run value. In particular,
36
Journal of Applied Corporate Finance • Volume 31 Number 2
building “purpose-driven “companies may well be the key
to increasing the commitment to the firm by employees,
customers, and other stakeholders, and in attracting and
motivating top talent. And by removing waste and inefficiencies in the value chain—which also reduces the environmental
footprint and cost of resources—and in creating innovations
and solutions that reduce externalities and help manage the
challenges we are facing, these companies are leading the way
to a more prosperous future.9
All companies fulfill a valuable role for their customers; if they didn’t, our market system would put them out of
business. All businesses also create external costs and benefits
for society. For some industries, there is a more direct correlation between positive externalities and business success. Take
the case of health care companies, which must improve their
customers’ health if they are to succeed in the market. In other
cases, however, such as oil and gas companies, it is obvious
that negative externalities have not been adequately accounted
for. Though regulation has recently been catching up, the costs
assessed such companies for these externalities have historically not been high enough. But this is changing as regulations
become stricter and customers are increasingly considering
such costs in their decisions. New regulatory requirements
and growing demand for fuel efficient and electrical cars in
Norway provide a good example.
Summa’s Use of the SDGs
Hence, how “future-proof ” a company is, depends on its
external ESG impact. But how should investors—and the
companies they invest in—assess this impact?
Summa was among the first private equity firms to use the
UN Sustainable Development Goals (“SDGs”) as a framework
for assessing the relative size and importance of the social costs
and benefits associated with positive and negative externalities
when evaluating investments. The 17 Goals, as represented
by Good Health and Wellbeing (#3), Quality Education
(#4), Responsible Consumption and Production (#12),
and Climate Action (#13), identify and help define the key
problems and challenges we now confront as a society. And
although federal and local governments can develop strategies
and design regulatory policies to address these problems, it is
essentially the businesses and the marketplace that are likely
to play the greatest role in developing and carrying out the
solutions. In this sense, while regulation certainly encourages
the private sector to respond to ESG concerns, another force
driving the increasing correlation between business opportu9 Gartenberg, Claudine, Andrea Prat, and George Serafeim. “Corporate Purpose and
Financial Performance.” Organization Science (forthcoming).
Spring 2019
nities and the externalities targeted by the SDGs is coming
from corporate stakeholders—from customers’ demand for
more positive social impact, employees’ desire to work for
purpose-driven organizations, and a growing number of investors’ preference for funding such companies.
For this reason, we at Summa avoid investments that are
“net negative” on externalities, as measured by the SDGs. And
this means that we favor, for example, energy-efficient companies over coal-based or CO2-heavy companies, aquaculture
over livestock investments, and ed-tech over gaming companies. For each investment that we consider, we use the SDGs
to help us understand its potential for value creation as well as
how risky or “future-proof ” it is. We use an ESG framework to
assess risk. We believe the risk from ESG factors has increased
as the transparency and information-sharing associated with
negative ESG events have increased,10 including significant
negative effects on customer behavior and willingness to pay.11
As regulation has also increased, the consequences of failing to
meet ESG criteria are becoming more apparent as the market
multiples of listed companies show an increasingly positive
correlation with corporate ESG performance.12 For private
equity investors like us, this is important since our financial
goal is not to maximize our profit margins and earnings, but,
more important, to increase the multiples at which we end
up selling our companies in a way that maximizes their longrun value, both for us and the next owners of the businesses.
And since we expect to own our portfolio companies for
at least a five-year period, and often sell to buyers that look
out another five years, we need to make a roughly 10-year
assessment of how “future proof ” the company is when
considering our initial investment. Within this time frame,
negative externalities are likely to come with much higher
costs and reduce the attractiveness of the business for a future
buyer. Furthermore, we need to assess how the situation in
the world at that point is affecting the value and performance
of our companies. In the case of climate risk, companies face
a significant ancillary potential risk in the sense that we may
be only 10 years away from knowing which of the two main
10 Anderson, Ashley A., “Effects of Social Media Use on Climate Change Opinion,
Knowledge, and Behavior,” Oxford Research Encyclopedia of Climate Science (March
2017).
[online]
URL:
http://oxfordre.com/climatescience/view/10.1093/acrefore/9780190228620.001.0001/acrefore-9780190228620-e-369. [Accessed March
10, 2019].
11 Dagher, Grace, and Omar Itani, “The influence of environmental attitude, environmental concern and social influence on green purchasing behavior,” Review of Business
Research, Vol. 12, No. 2 (2012), pp 104-111. [online] URL: https://www.researchgate.
net/publication/302884426_The_influence_of_environmental_attitude_environmental_
concern_and_social_influence_on_green_purchasing_behaviour [Accessed March 9,
2019].
12 Serafeim, George, “Public Sentiment and the Price of Corporate Sustainability,”
Harvard Business School Working Paper, No. 19-044 (October 2018).
Journal of Applied Corporate Finance • Volume 31 Number 2
climate change scenarios is more likely to materialize.13 The
risk to certain sectors is significant in these various scenarios,
and so we need to evaluate potential downsides that may not
emerge until the time we plan to exit the companies.
Hence, at Summa we believe that evaluating and choosing to invest in companies based on their alignment with
the SDGs and the associated value creation opportunities—
while at the same time understanding the ESG risks to the
companies under different climate and social scenarios—are
fundamental to creating high returns while minimizing the
risks of the investment.
Identifying and Creating Winners Via Summa (the
Summa Way)
Summa’s mission, then, is to invest in companies that are
solving our global challenges while at the same time providing competitive returns for our limited partners. Our strategy
and approach are designed to achieve this mission.
The megatrends and challenges are viewed from the
perspective of the SDG framework that defines the challenges
we are targeting, which in turn has helped us identify the
three major themes of our investments: resource efficiency;
changing demographics, and tech-enablers. At Summa, we
have further selected some key areas within our themes.
Within these industries, we have built internal expertise and
we continuously monitor the trends and developments. We
have a proactive “sourcing” strategy in which we approach
sectors and companies we believe are uniquely positioned to
grow because they are either addressing some of the key bottlenecks and problem areas in the industry, or because they have
a strong platform and the organizational capabilities that we
can use to enlarge the scale of the business.
Approximately half of our investments have resulted
from a proactive approach of targeting and engaging with the
company. But even in the acquisitions in which we have been
contacted by the sellers in limited or full auctions, Summa has
often been the preferred buyer. This expressed preference of
sellers can be viewed as confirming the differentiating effect of
our focus on ESG themes, combined with our industry expertise and approach to assessing value creation partly through
SDGs. And since management—and usually the sellers too—
are co-investors with us after the acquisition, they are more
likely to choose a buyer they believe will be the most effective in increasing the long-run profitability and value of their
companies.
13 IPCC. Climate Change 2014: Synthesis Report. Contribution of Working Groups
I, II, and III to the Fifth Assessment Report of the Intergovernmental Panel on Climate
Change [Core Writing Team, R.K. Pachauri and L.A. Meyer (eds.)]. (Geneva, Switzerland:
IPCC, 2014).
Spring 2019
37
CASE STUDY: SALMON FARMING INDUSTRY
roducing over a million tons of salmon a year,
Norway provides 50% of the world’s supply,
and the salmon farming industry is Norway’s
second largest export industry with sales of
about 10 billion euros.*
The industry has shown high growth over several
decades. Such growth is expected to continue, and the
SDGs provide indications why the industry is future proof
and where the risk is:
• Attention to SDG #2, Zero Hunger, has increased as
the industry scales up. Global population growth requires
further growth in aquaculture. Animal protein production
uses significant input raw material that could be used for
human consumption. Salmon has the highest conversion of
feed into protein produced, requiring only about 1.3 kg of
feed to produce 1 kg of salmon, with the main ingredients
from sustainable and vegetarian input.
• Interest in SDG #3, Good Health and Wellbeing,
is also a strong consumer trend. Fish is rich in Omega
3, which improves longevity and health; and there is a
clear trend for consumers to substitute fish and vegetarian
options for red meat.
• SDG #12, Responsible Consumption and Production, has a strong focus in Norway. Regulation of food
production is very strict, and hence both mechanical and
medical treatments of disease, which is an issue in the
industry, are restricted compared to other countries. While
there has been criticism of the input factors in salmon feed,
the Norwegian industry does not use antibiotics (which is
common in raising livestock), and the regulation of feed is
strict to avoid health safety risk.
• SDG #13, Climate Action, is helped by the
replacement of other protein sources by salmon. Salmon
production does not require deforestation and increased
agricultural land, since it is done at sea or in buildings.
Salmon does not emit methane gas as livestock does, and
does not deplete fresh water resources.
• The effect of salmon farming on SDG #14, Life
Under Water, is mixed. Though regulation is the strictest in
the world, the industry is still plagued with fish-transmitted
disease and high fish mortality, and the treatments can have
negative effects on their surroundings. For the industry to
scale further, these issues have to be solved.
The industry has relatively limited risk from climate
change, as compared to agriculture and livestock. Salmon
is very versatile and can survive ranges in sea level temperature from zero degrees to over 20 degrees Celsius.
Regulation is strict, and consumers are also quite sensitive to problems that arise for certain producers. Hence, the
risk within ESG and compliance is significant for producers
that do not comply with regulation of feed, disease, and
treatment management, or that do not have a high-quality
value chain—one where, for example, consumer health
could be affected by Listeria bacteria.
While the investment opportunities can be found
across the entire value chain, the industry is still producing largely by the same methods and technologies as many
years ago. The high-growth areas are hence in the shift to
new methods—making use of closed cages, big data, and
surveillance—and in solutions that improve SDG #14, e.g.,
salmon lice and waste treatments.
*EY, “The Norwegian Aquaculture Analysis 2017,” (EYGM Limited, 2018).
https://www.ey.com/Publication/vwLUAssets/EY_-_The_Norwegian_Aquaculture_
Analysis_2017/$FILE/EY-Norwegian-Aquaculture-Analysis-2017.pdf. Accessed
April 5, 2019.
P
In the case of each of the companies we identify as targets,
we go through the exercise of identifying what challenges they
are solving, assessing how competitive and differentiated they
are in solving this challenge in their industry, and evaluating
their ability to scale. When defining the challenges they are
solving, we use the SDG framework. The 17 goals and 169
associated targets are a good analytical tool for assessing what
material and important benefits a company can provide its
customers and stakeholders, since they are based on areas
where there is a large gap relative to what is needed. If we
cannot see that the company is solving a challenge defined by
38
Journal of Applied Corporate Finance • Volume 31 Number 2
the SDG framework, it is not worth our spending time on it,
since the likelihood of promising both strong growth and a
“future-proof ” risk profile appears lower. Once we establish
the importance of and opportunity provided by the challenge,
we evaluate the company’s competitiveness in solving this
challenge. From a value creation and reward perspective, we
want our companies to outperform and provide the most effective—and at some point the market-leading—solutions to its
customers in the market place. Hence, we need to ensure that
our waste management and recycling companies, like Norsk
Gjenvinning and Sortera, have leading recycling technologies
Spring 2019
CASE STUDY: SORTERA
f the 13 tons of materials that are used each
year to support the lifestyle of an adult, only
five percent of the value of this material is
recovered.14 The resources available on the
planet are threatened with overconsumption. SDGs #11
(sustainable cities and communities), #12 (responsible
consumption and production) and #13 (climate action)
all address this great challenge. And growth in the world’s
population and wealth are all increasing the challenge of
disposing of waste.
In 2016, Summa invested in Sortera, a Swedish
company that collects and sorts waste from buildings;
it is the third largest player in its domestic market. The
space Sortera occupies benefits from both market and
regulatory tailwinds; and since acquiring it two and a
half years ago, we have now quadrupled the company’s
revenue from 200 million SEK to over one billion SEK,
and increased employment from 95 to 350 employees;
such increases have been accomplished through bolt-on
acquisitions as well as organic growth and synergies.
Using innovative industrial processes—which we discuss
in more detail below—Sortera is able to turn waste
into valuable resources, such as wood and metals; and
this recycling of critical materials in turn contributes
to significant CO2 reductions. And while beneficial to
the environment, our company’s use of these innovative
recycling processes increases its company’s revenues
and margins, thereby doubly enhancing the long-term
attractiveness of the business.
As revealed by the SDG-aligned KPIs that we
measure and track, Sortera collected 205,000 tons of
waste in 2017, of which 86% was recycled. Through its
sorting, recycling, and processing of material, Sortera’s
net reduction of CO2 was 226,000 tons. This is viewed as
the equivalent of saving 558,000 barrels of oil or taking
48,000 passenger vehicles off the road for a year which
is real impact.
Since its acquisition by Summa in 2016, moreover,
Sortera has signif icantly increased its focus on
sustainability and now publishes a yearly sustainability
report that documents its investment in recycling
technology, improvements in its value chain, and
compliance with ESG regulations and principles. Thanks
to the public and regulatory attention received by the
waste management industry in recent years, Sortera
has come to be viewed as a Swedish model of best-inclass ESG practices. This reputation is giving it a strong
competitive edge, allowing it to grow market share and
demand premium rates for its high-quality services.
In 2017, Sortera invested in a new electric recycling
facility, which was the largest capital expenditure in
its history. This investment increased profitability by
reducing downstream costs as the recycling rate increased,
thereby reducing per unit labor costs by enabling the
production of more material per shift and reducing energy
costs through electrification. The investment also had
strong social benefits, improving the health and safety
of employees and reducing the odor, noise, and exposure
to fire experienced by neighboring communities. From
an environmental standpoint, the increase in material
recycling saved valuable resources while reducing carbon
emission by shifting to a renewable energy source. And
from a regulatory compliance perspective, our facility
helped the Swedish construction industry comply with
the EU Directive.15
Further, because the largest cost and part of
operations is the logistical costs involved collecting the
waste, the company capped electronically the maximum
speed of its trucks—to the legal limit of 80 km/hour.
The result was that its fuel consumption and costs fell by
about 10%, further reducing carbon emissions as well as
the number of accidents. And while addressing health,
safety, and compliance/speeding issues, the company did
not see any negative effect on the productivity of the fleet.
In sum, Sortera has shown strong growth in revenues
and profits not despite, but rather with the help of, its
improvement in ESG factors and sustainability targets as
measured by Summa’s SDG framework, as the company’s
operating costs have been reduced, and its customer base
improved, as a direct consequence.
14 Stuchtey, Martin, Per-Anders Enkvist, Klaus Zumwinkel, “A Good Disruption:
Redefining Growth in the Twenty-First Century,” (Bloomsbury Publishing, 2015).
15 Directive (EU) 2018/852 of the European Parliament and of the Council of
30 May 2018 amending Directive 94/62/EC on packaging and packaging waste. OJ
L 150 (June 14, 2018), pp. 141-154.
O
Journal of Applied Corporate Finance • Volume 31 Number 2
Spring 2019
39
Figure 1
Turning Waste into Resources
Turning Waste into Resources
INVESTMENT THEME
LOCATION
SECTOR
Resource
efficiency
Sweden
Recycling
2017 REVENUE
RENEWABLE ELECTRICITY
CARBON FOOTPRINT
SEK 692m
100%
13 157 tonnes
NO. OF EMPLOYEES
% FEMALE
STAFF TURNOVER
250
18%
10%
SDG ALIGNMENT
KPI s
205k
tonnes of waste
processed
28%
material
recycling
226k
tonnes net
CO 2 savings 1
1 Carbon savings from recycling activities estimated by Sortera. Carbon emissions and net savings estimated by Normative.
and the infrastructures to increase material recycling rates as well
as effective value chains. Our health care companies, like Logex,
Hytest and Olink Proetomics, are working toward increasing
patient outcomes and improving lives through solutions that are
cost attractive and better relative to competitor. Our technology
companies, like EcoOnline, are helping their customers comply
with regulations at a significantly lower cost and in a more
customer-friendly way. Hence, the more positive externalities
our companies can create, the more they will outperform, and
their revenues and margins should increase as the core of their
business is aligned with the need for great solutions.
So, our due diligence is actively looking at how these
companies are likely to bring about progress in meeting the
SDGs, by providing better health, increased recycling, better
education, and better compliance, and doing so in a way that
is likely to be more effective and efficient than other solutions
40
Journal of Applied Corporate Finance • Volume 31 Number 2
and providers. And in so doing we have to assess any ESG risk
and compliance risk, since failure in any one of these areas
can significantly hurt the development of the company and
increase exposure to risk. And these risks can be substantial.
For a health care company, it doesn’t matter that you have
the best solution if your patient journals are hacked or fail to
comply with GDPR. Or for a waste management company,
it doesn’t matter if you have the highest recycling rate, but
continue to allow hazardous waste into the recycling process.
At Summa, we have created a standard way of assisting
our portfolio companies in their growth—one that we call Via
Summa. We think of each of our companies as undergoing
a journey on the Via Summa, a path that leads to their next
owner and, as a consequence of that process, becoming a more
efficient company with a higher long-run value and growth
trajectory. While many of the elements are traditional private
Spring 2019
equity approaches, such as 100-day plans, operating models,
organizational assessments, and board cycles, our Via Summa
has integrated its distinctive approach to managing externalities and the SDGs into these traditional components. Our
companies begin by defining and articulating their purpose,
assessing both the contributions and the requirements of each
of their important stakeholders, and then developing and
implementing key metrics that can be used to evaluate the
company’s progress in addressing the SDGs and ESG factors
that are relevant to each.
The focus of the company’s strategy is on improving the
products and services they are providing their customers—
and as part of that strategy, the solution to the SDGs that is
effectively provided by such products. Thus, the success of our
companies is tracked and evaluated not only through the financial and operational metrics, but also in the alignment of such
metrics with SDG and ESG metrics. We have also developed
an organizational assessment and framework that guide our
companies in creating purpose-driven, high-performing organizations while assessing significant ESG risks. In our experience,
companies that frame their purpose in the context of the social
problems they are able to solve, and actively incorporate this
into their strategic plan and operating decisions, are more likely
to succeed in motivating and energizing their managers and
employees, while attracting better talent to their organization.
When measured by standard financial measures, the performance of our portfolio has been strong, with the reported
Internal Rate of Return to our investors in the top quartile
(according to Prequin data). And partly on the strength of that
performance, we recently closed our second fund (Fund II) of
about 650 million EUR. Since we raised our first fund (Fund
I) of around 450 MEUR three years ago, we have experienced
significant recognition from investors of the value of our SDG
alignment and ESG focus, and some of the leading global
limited partners are actively searching for private equity funds
that work according to these principles and methods.
Journal of Applied Corporate Finance • Volume 31 Number 2
Summa Summarum
Throughout the evolution and growth of the private equity
industry, the management of externalities was rarely viewed
as a core competence or source of competitive advantage.
However, in the wake of the global financial crisis, the growing number of PE firms that comprise PE 4.0 have responded
to the growing focus on climate change, social issues, and technology disruption by broadening the corporate mission to
encompass all important stakeholders. And in the process, the
management of ESG risks and pursuit of ESG opportunities
have become increasingly fundamental to the staying power
and value creation potential of PE firms, both by reducing
the risk of their investments and increasing their resilience to
changes in the political and regulatory environment. The UN
SDGs is an effective framework for PE firms when screening
investment opportunities and aligning their strategic direction
and value creation plans with ESG principles and practices to
ensure that risks are limited and companies well and responsibly run.
Although PE 4.0 is in its infancy, the change is happening
faster than almost anyone expected. Private equity firms that
are late to the table will be less successful in raising funds, lose
in the competition for talent, be disadvantaged in deal sourcing, and face significant ESG risks—and as a result, they will
achieve lower exit valuations and end up creating less value. By
failing to foresee and prepare themselves for this new future,
these private equity firms will feel the consequences in both
the value of their investments—and in their standing in the
business community.
Reynir Indahl is the Founder and Managing Partner of Summa Equity.
Hannah Gunvor Jacobsen is an Investment Director of Summa
Equity and Head of ESG.
Spring 2019
41
ADVISORY BOARD
EDITORIAL
Yakov Amihud
New York University
Carl Ferenbach
High Meadows Foundation
Mary Barth
Stanford University
Kenneth French
Dartmouth College
Amar Bhidé
Tufts University
Martin Fridson
Lehmann, Livian, Fridson
Advisors LLC
Michael Bradley
Duke University
Richard Brealey
London Business School
Michael Brennan
University of California,
Los Angeles
Stuart L. Gillan
University of Georgia
Richard Greco
Filangieri Capital Partners
Trevor Harris
Columbia University
Robert Bruner
University of Virginia
Glenn Hubbard
Columbia University
Charles Calomiris
Columbia University
Michael Jensen
Harvard University
Christopher Culp
Johns Hopkins Institute for
Applied Economics
Steven Kaplan
University of Chicago
Howard Davies
Institut d’Études Politiques
de Paris
Donald Lessard
Massachusetts Institute of
Technology
John McConnell
Purdue University
Robert Merton
Massachusetts Institute of
Technology
Gregory V. Milano
Fortuna Advisors LLC
Clifford Smith, Jr.
University of Rochester
Editor-in-Chief
Donald H. Chew, Jr.
Charles Smithson
Rutter Associates
Associate Editor
John L. McCormack
Laura Starks
University of Texas at Austin
Design and Production
Mary McBride
Joel M. Stern
Stern Value Management
Assistant Editor
Michael E. Chew
G. Bennett Stewart
EVA Dimensions
Stewart Myers
Massachusetts Institute of
Technology
René Stulz
The Ohio State University
Robert Parrino
University of Texas at Austin
Sheridan Titman
University of Texas at Austin
Richard Ruback
Harvard Business School
Alex Triantis
University of Maryland
G. William Schwert
University of Rochester
Laura D’Andrea Tyson
University of California,
Berkeley
David Larcker
Stanford University
Alan Shapiro
University of Southern
California
Martin Leibowitz
Morgan Stanley
Betty Simkins
Oklahoma State University
Robert Eccles
Harvard Business School
Journal of Applied Corporate Finance (ISSN 1078-1196 [print], ISSN 1745-6622
[online]) is published quarterly by Wiley Subscription Services, Inc., a Wiley Company, 111 River St., Hoboken, NJ 07030-5774 USA.
Postmaster: Send all address changes to JOURNAL OF APPLIED CORPORATE FINANCE, John Wiley & Sons Inc., c/o The Sheridan Press, PO Box 465, Hanover,
PA 17331 USA.
Information for Subscribers
Journal of Applied Corporate Finance is published in four issues per year. Institutional subscription prices for 2019 are:
Print & Online: US$803 (US), US$959 (Rest of World), €624, (Europe), £491 (UK).
Commercial subscription prices for 2019 are: Print & Online: US$538 (US), US$643
(Rest of World), €418 (Europe), £329 (UK). Individual subscription prices for 2019
are: Print & Online: US$133 (US), $133 (Rest of World), €111 (Europe), £76 (UK).
Student subscription prices for 2019 are: Print & Online: US$48 (US), $48 (Rest of
World), €40 (Europe), £27 (UK). Prices are exclusive of tax. Asia-Pacific GST, Canadian GST/HST and European VAT will be applied at the appropriate rates. For more information on current tax rates, please go to https://onlinelibrary.wiley.com/library-info/
products/price-lists/payment. The price includes online access to the current and all
online back files to January 1, 2015, where available. For other pricing options, including access information and terms and conditions, please visit https://onlinelibrary.
wiley.com/library-info/products/price-lists. Terms of use can be found here: https://
onlinelibrary.wiley.com/terms-and-conditions.
Delivery Terms and Legal Title
Where the subscription price includes print issues and delivery is to the recipient’s
address, delivery terms are Delivered at Place (DAP); the recipient is responsible for
paying any import duty or taxes. Title to all issues transfers FOB our shipping point,
freight prepaid. We will endeavour to fulfil claims for missing or damaged copies within
six months of publication, within our reasonable discretion and subject to availability.
Journal Customer Services: For ordering information, claims and any inquiry concerning your journal subscription please go to https://hub.wiley.com/community/support/onlinelibrary or contact your nearest office.
Americas: Email: cs-journals@wiley.com; Tel: +1 781 388 8598 or
+1 800 835 6770 (toll free in the USA and Canada).
Europe, Middle East and Africa: Email: cs-journals@wiley.com;
Tel: +44 (0) 1865 778315.
Asia Pacific: Email: cs-journals@wiley.com; Tel: +65 6511 8000.
Japan: For Japanese speaking support, Email: cs-japan@wiley.com
Visit our Online Customer Help available in 7 languages at
https://hub.wiley.com/community/support/onlinelibrary
Production Editor: Shalini Chawla (email: jacf@wiley.com).
Back Issues: Single issues from current and recent volumes are available at the
current single issue price from cs-journals@wiley.com. Earlier issues may be
obtained from Periodicals Service Company, 351 Fairview Avenue – Ste 300,
Hudson, NY 12534, USA. Tel: +1 518 537 4700, Fax: +1 518 537 5899,
Email: psc@periodicals.com
View this journal online at wileyonlinelibrary.com/journal/jacf.
Ross Watts
Massachusetts Institute
of Technology
Jerold Zimmerman
University of Rochester
Statement on Research4Life
Wiley is a founding member of the UN-backed HINARI, AGORA, and OARE initiatives. They are now collectively known as Research4Life, making online scientific
content available free or at nominal cost to researchers in developing countries.
Please visit Wiley’s Content Access – Corporate Citizenship site: http://www.wiley.
com/WileyCDA/Section/id-390082.html
Journal of Applied Corporate Finance accepts articles for Open Access publication.
Please visit https://authorservices.wiley.com/author-resources/Journal-Authors/
open-access/onlineopen.html for further information about OnlineOpen.
Wiley’s Corporate Citizenship initiative seeks to address the environmental, social,
economic, and ethical challenges faced in our business and which are important to
our diverse stakeholder groups. Since launching the initiative, we have focused on
sharing our content with those in need, enhancing community philanthropy, reducing our carbon impact, creating global guidelines and best practices for paper use,
establishing a vendor code of ethics, and engaging our colleagues and other stakeholders in our efforts.
Follow our progress at www.wiley.com/go/citizenship.
Abstracting and Indexing Services
The Journal is indexed by Accounting and Tax Index, Emerald Management
Reviews (Online Edition), Environmental Science and Pollution Management,
Risk Abstracts (Online Edition), and Banking Information Index.
Disclaimer
The Publisher, Cantillon and Mann, its affiliates, and Editors cannot be held responsible for errors or any consequences arising from the use of information contained in
this journal; the views and opinions expressed do not necessarily reflect those of the
Publisher, Cantillon and Mann, its affiliates, and Editors, neither does the publication
of advertisements constitute any endorsement by the Publisher, Cantillon and Mann,
its affiliates, and Editors of the products advertised.
Copyright and Copying
Copyright © 2019 Cantillon and Mann. All rights reserved. No part of this publication may be reproduced, stored or transmitted in any form or by any means without
the prior permission in writing from the copyright holder. Authorization to photocopy
items for internal and personal use is granted by the copyright holder for libraries
and other users registered with their local Reproduction Rights Organization (RRO),
e.g., Copyright Clearance Center (CCC), 222 Rosewood Drive, Danvers, MA 01923,
USA (www.copyright.com), provided the appropriate fee is paid directly to the RRO.
This consent does not extend to other kinds of copying such as copying for general
distribution, for advertising or promotional purposes, for republication, for creating
new collective works or for resale. Permissions for such reuse can be obtained using
the RightsLink “Request Permissions” link on Wiley Online Library. Special requests
should be addressed to: permissions@wiley.com.