As we near the end of COP26 in Glasgow, it is anticipated that ESG will continue to move up the corporate agenda. Last week in our webinar entitled "ESG & Restructuring: How to be sustainable when dealing with distress" our Restructuring & Insolvency team discussed some of the emerging ESG themes which may be relevant for the restructuring sector.
Here are our top take aways from the session:-
Why is ESG relevant in a restructuring context?
ESG stands for Environment, Social and Governance. The ESG credentials of any business are not limited to how the organisation describes itself – they are measurable and relevant to stakeholders. When it comes to ESG performance, stakeholder engagement will be key i.e. how does the business engage with its employees, their community, shareholders and the environment? Many businesses are now proactively setting ESG targets and tracking key performance indicators. As such, businesses undergoing restructuring and those operating in the insolvency sector can expect there to be increased ESG scrutiny from buyers, investors and lenders.
What impact could ESG have on the attitudes of lenders & investors?
When considering the potential restructuring options available to distressed businesses, the attitudes of lenders and investors to risk will be fundamental. ESG factors are becoming increasingly important for stakeholders when assessing the overall condition, prospects and stability of a business. This change in attitude may partly be driven by the fact that financial institutions are themselves subject to more stringent ESG disclosure requirements (and therefore require to scrutinise their lending portfolios accordingly). There is also growing recognition that ESG considerations could potentially pose material risks to businesses and adversely impact credit ratings. Businesses which are able to get ahead of the curve when it comes to putting in place the right ESG policies and strategies are likely to find this beneficial when securing funding or seeking to maximise value in a distressed situation.
How might we see ESG impact on distressed asset disposals?
Even where property is being disposed of as a result of enforcement action, ESG could still be a factor in determining whether a buyer is willing to proceed. Pre-acquisition, a purchaser may seek to explore any known ESG issues and consider whether any improvements to the property will be required and the associated cost. Upon appointment, an insolvency practitioner may find it useful to understand how the property has been managed to date from an ESG perspective and who has been responsible for the day-to-day ESG compliance on the ground. Evidence that the property has been well managed from an ESG perspective will assist in instilling confidence in a prospective buyer. There has been an increased focus on the energy performance of buildings. Whilst the energy performance regulation system in England and Wales is similar to that in Scotland, there are several important differences. As such, any party involved in the restructuring of a business which includes any real estate should take advice as to the EPC position as soon as possible.
If you would like to watch our recent webinar 'ESG and restructuring: how to be sustainable when dealing with distress' please click below: https://www.youtube.com/watch?v=Dz3YvLvCTOM