Direct Investments

Moving the dial on ESG – Mercia’s roadmap

Investment Director, Jill Williams explains how important Mercia‘s core principles have accelerated our ESG journey and how best practice is vital moving forward.

Many businesses will have some degree of track record in ‘making a difference’. At Mercia, we have a track record of positive impact within the UK’s regions. This is as much a representation of our core corporate values as it is about driving a wider agenda around the regional funding gap, and the need for fast-growth SMEs to have access to critical investment.

Our history and values have therefore formed the foundations on which to build as we commence our ESG journey. Codifying these principles around environmental, social and governance (ESG) issues into our policies and culture is now a natural extension of our purpose.

ESG has always had a place on the Board agenda, but is gaining traction on its implementation, accelerated both by the lockdown and by the societal disruption seen during this period. Environmental issues have taken centre stage and the Black Lives Matter movement has gathered pace, while the role that business must play in the wider agenda of diversity, social mobility and ethical governance has become more nuanced and more pressing.

We want to share our outlook and decisions around our ESG journey to provide some insight and to support NEDs in assisting the Boards of our portfolio businesses in navigating this topic. We have only taken the early steps of our journey, but we are now defining our own internal strategy, whilst also developing our practice around investment decision-making and our active ownership of the businesses in which we invest.

Responsible investment

From every starting point a course of action must be plotted, in particular the means by which progress and ultimately success will be measured. Using a recognised benchmark that not only acts as a guideline but is also universally recognised and approved by your industry and peers is important. This will differ for each sector, but for us the gold standard methodology is the UN’s Principles for Responsible Investment (PRI). The six principles are “a voluntary and aspirational set of investment principles that offer a menu of possible actions for incorporating ESG issues into investment practice” – essentially a blueprint to follow that also provides the impact rationale behind each action. We have also been inspired by the UN’s Sustainable Development Goals when defining our guiding principles.

Understanding the value of ESG is what will make it sustainable. As much as there is a higher moral purpose, there still needs to be a commercial imperative. Mercia recognises that good ESG performance is associated with better business performance. Managing compliance and reducing exposure to risk is aligned with managing for value and should lead to strategic advantage. We are fully invested in our belief that our increased focus on ESG will allow us to create, grow and protect value and ultimately generate market-leading returns. This belief must be owned by the entire team.

Leading by example

Successfully facilitating the adoption of ESG needs to be led from the highest level in the business, but ultimately be owned and delivered by a person or team, depending on the size of the business. A formal role or division will need autonomy and time to audit, review and make the necessary changes in terms of how a business conducts its business within an ESG framework.

For Mercia, this will be how we develop our strategy and practice to incorporate ESG issues into our investment decisions and portfolio management strategies on an increasing basis. Our Responsible Investment team will consider the whole of our investment cycle, from deal origination and assessment, through ownership, and towards realisation.

Responsible Investment principles will be steadily integrated over the course of the financial year into our investment papers, portfolio reporting and investor communications. Both pre- and post-investment, we will embrace a unified approach and measures across the investment process.

We will increase training for our investment ream on ESG-related risks and opportunities. We will clearly define processes and increase visibility of ESG within the investment decision-making process as well as embracing the monitoring and review of ESG, developing key performance indicators and targets. We have started this process by my appointment as ESG project leader, and the training that I have undertaken with the British Private Equity & Venture Capital Association.

ESG translated across our portfolio

An essential role for our non-executives will be to help embed our ESG principles across our portfolio. Naturally, any ESG considerations will have to be driven and delivered by the portfolio companies’ management teams. Meanwhile, we will be guided by Boards around where they see opportunity for value creation or strategic advantage, and we will provide support where risks are identified. We would like to see ESG on our boards’ agendas because we know its potential to add value. And the sooner we start this process, the greater that potential.

Jill Williams is Mercia’s Investment Director, Private Equity