Where real value lies: communicating on ESG indicators in support of a restructuring process

A collective insight by Andrés Luther (Hirzel.Neef.Schmid/amo), Alexis Madelain (Havas Paris/amo), Victor Fernandez (Tinkle/amo), Vikki Kosmalska (Maitland/amo), Pierluigi Cavarai & Caterina Tonini (Havas PR).


Many companies are facing financial restructuring this year. Companies have made the most of historically low interest rates over many years, or indeed taken on additional capital to get through the pandemic. Now as they look to restructure their finances, they face a new set of more stringent ESG criteria to access capital, a factor which may impact associated costs.

ESG factors and ratings increase awareness of a distressed asset’s true potentialand are increasingly relevant to financial stakeholders when assessing the viability of a business looking to refinance. Appropriate communications on ESG performance are essential to a successful restructuring.

 

1. What do ESG indicators tell us about a distressed asset’s future performance?

 

ESG practices are key to a business’s positioning. With proper implementation and communications, these can provide a boon for stakeholder onboarding, costs, and long-term benefits all along the restructuring process. Such assessments can prove crucial to retaining and recruiting clients and suppliers, attracting new talent, and stimulating upskilling within the workforce. As such, ESG indicators are key to the length and depth of the measures implemented.

The latest international developments following the start of the war in Ukraine give a clear idea of companies’ and markets’ sensitivity to ESG risks. The Yale School of Management’s research has shown that as of 31 May, more than a thousand major companies are in the process of withdrawing from Russia, including hugely symbolic names like McDonalds. In addition, investment funds with considerable ESG ambitions such as DWS Group are divesting or halting investment in Russia.

The impact on capital attraction is undeniable. Several studies have shown that a higher ESG rating on average lowers the cost of capital in both developed and emerging markets, with the cost of equity and debt following the same relationship. Companies with lower ESG ratings which strengthened their ESG rating experienced reduced costs of capital, especially in developed markets.

High corporate governance standards (G) carry low default risks, favouring the cost of capital. According to a 2020 MSCI report, a 35 to 50 basis points cost of capital reduction translates into an company value increase in the range of 8% to 12%, plus considerable cost savings upon debt issuance.

Planning, implementing and communicating the ESG impact of thephysical restructuring of a company’s HQ and premises can also provide long-term value creation elements and solid proof points for an engaging ESG narrative.

 

2. How can an ESG-focused communications effort support a restructuring process?

 

We know ESG indicators say a lot about a distressed asset’s future performance. Thoughtful communications on this can make the difference in a complex restructuring process.

  • Identifying what matters to the business model: how does the relevance of ESG issues vary from industry to industry, company by company? For example, fuel efficiency presumably has a bigger impact on an airline than it does for an investment bank. Rather than adopt a one-size-fits-all approach, companies need to work to develop an ESG scoring framework that is specific and focuses on material/immaterial issues pertinent to the company.
  • Setting KPIs:what ESG metrics do we want to showcase? This involves defining a tailored set of quantitative and qualitative metrics, with a clear technical protocol providing guidance on definitions, scope, implementation, compilation, and presentation of every sustainability accounting metric, offering comprehensive assurance for stakeholders.
  • Creating a self-sustaining and value-centric narrative. Based on understanding the business model and KPIs, businesses should focus on developing a convincing narrative about their long-term ability to create value. This narrative helps convince and involve key stakeholders (banks, creditors, suppliers, insolvency practitioners) in a collective effort to outperform KPIs and generate long-term value in a distressed asset.

 

The bottom line:

As companies try to juggle multiple stakeholders, identifying a central set of ESG principles which underpin business activity and have the full backing of the management team will ensure more streamlined and consistent communications, which in the longer term can make all the difference to the viability of financing options.