Quantifying ESG outcome a challenge

Putting a dollar figure on savings resulting from an ESG policy is a challenging exercise few firms have attempted, partly because of the difficulty in isolating financial impact.

“ESG has great potential for improving the bottom line and for cost savings, but that could come in 20 different avenues, some of which would be intangible,” says James Pearson, chief executive officer of consultancy Pacific Risk Advisors.

Energy cost savings for a manufacturing company is easier to quantify than the bottom line impact from, for example, improved health and safety conditions in the workplace, which results in higher productivity and lower recruitment costs.

“The biggest problem is an intangible element for which there will be some savings identified. Is it necessarily attributed to an ESG policy?”

Kohlberg Kravis Roberts is among the few firms that break out the bottom line impact of ESG measures in Asia investments. One example is Korea-based portfolio company Oriental Brewery (OBI), which KKR together with co-investor Affinity Equity Partners exited last month by selling it back to the original owner AB InBev in a deal valued at $5.8 billion.

KKR’s Capstone team worked on several energy-saving tasks, including installing a modified boiler system and optimizing the fermentation processes in-house. From 2008 to 2012, OBI avoided a total of $17.7 million in energy costs, according to KKR.

Lunar Capital, one of only two China-based GPs signatory to the UN’s Principles for Responsible Investment (the other is venture capital firm Jiuding Capital), has also made attempts to translate ESG into dollars.

For its China-based baby wear company, Yeehoo, the firm launched several responsible investment measures including enhanced quality control of the supply chain. The initiatives resulted in savings of roughly 1.5 percent to 2.5 percent of Yehoo’s annual revenue, according to the firm.

However, these two firms are exceptions. In most cases, the ESG policy measures can be isolated, but not the resulting financial impact.

“The disconnect is on the reporting side,” Pearson said. “Because of environmental awareness, people have thought differently and therefore saved on costs. But that’s not necessarily attributed to an ESG policy.”

He defines ESG in terms of risk, not in terms of saving money, and sees it as an integrated part of risk management during the due diligence phase. What’s learned during the due diligence phase will pay off after the investment is made.

“Post-investment management of ESG risk is where you get the cost savings,” he said.