Restructuring and transaction activity is picking up as companies look to recover from the pandemic. How can a focus on ESG or diversity and inclusion (D&I) support better outcomes for these businesses - and where are the challenges holding them back? Restructuring partners Steve Russell and David Kelly join host Rowena Morris to talk through PwC’s research findings and the steps to take to act now to recover and grow. Listen and subscribe today.
Hello everyone, and welcome to this episode of our Business in Focus podcast. I am Rowena Morris, a director at PwC, and I am your host for this episode. Today, we are going to be taking a closer look at the role that ESG and inclusion and diversity commitments are playing for both investors and companies. We will be discussing the impact that they have on outcomes during restructuring activity, and how to best factor it into your plans as we emerge from the immediate impact of the pandemic. It's a topic that's being explored by our Act Now campaign in our latest report. We will be taking a look at some of the latest findings from the survey of both organisations as well as the investor community. To bring the research to life today and help turn the findings into actionable steps for you all, I am joined by two partners from our restructuring practice; Steve Russell, who heads up our Business Restructuring Services team; and David Kelly, who is our markets and services lead for our London Restructuring team. Welcome to both of you, fantastic to have you here with us today. To get us going, it would be lovely to have a quick intro from you both, and why this topic is of interest to you. Steve, would you like to kick off?
Yeah, thanks Rowena. I’ve been in the restructuring industry for almost 30 years now. Why am I passionate about the topics? From all of those years, I have seen the impact that a truly diverse skill set, backgrounds that are brought to bear into client situations can make a massive difference. When we turn to ESG, I can only summarise that in the last 9 to 12 months, both the volume and the rate of incoming calls on this topic from our clients has increased exponentially, so it's clearly an issue on all of our clients’ agendas.
That’s a brilliant intro Steve, and David, how about you?
Thanks Rowena, I am David Kelly and I am an insolvency practitioner here within the restructuring team at PwC. As Steve has mentioned, we've actually seen the benefits that the focus on diversity and inclusion has brought to our 600 strong restructuring team, but I was actually really keen to understand the benefits of incorporating diversity and inclusion within change management and corporate turnaround. Rowena as I investigated, I was really surprised that there was really limited empirical evidence out there in the market and so I was really pleased that we were able to commission this first survey of diversity and inclusion, but also ESG across the financial community here in the UK, and it's a pleasure to have the opportunity to share the output on this podcast with you.
Excellent, let's get started, a lot to cover. Steve, I am going to kick off with you first. The nature of the pandemic and the government support in response to its impact created very unusual and challenging conditions for organisations, how are we seeing that reaction to, as well as recovery from play out for business?
Rowena, the first point to make is that in the first few months post pandemic, it was very much about damage limitation as people scrambled for liquidity as the full effect of the drop off of business became clear, in particular, looking at the working capital liquidity and assessing the impact on their business. However, there was liquidity in the market and clearly as government support, not just in terms of the loan schemes, but also the other forms of support, the softer forms of support that were put out there, it very much calmed down, and we entered a period where there were lots and lots of deals being done in the market, M&A transactions that may or may not be involved in element of restructuring, but certainly a huge number of deals. As we get to the end, here at the backend of September, and the support from government starts to unwind, and we start to get back to something approaching normality, then we're seeing that businesses need to reassess again, think about what the next period entails for their business. In that, it's basically considering all of the different aspects of their business model, their supply chain, as well as liquidity and potential restructuring options.
Lots to juggle, and I am going to go to David now. I'd like to add another layer, the ESG and inclusion piece to this. We've all seen how anecdotally the focus and conversations around net zero increased during the height of the pandemic. There's also no getting away from the people agenda, and the role, as you were saying, that diversity and inclusion has to play there. How is this factoring into the recovery and growth activity that we're seeing?
Rowena, as you mentioned, we are seeing business focus moving from recovery to growth, and as part of this growth agenda, there is a real competition for talent. We've seen the headlines about the employment gap, and we know that ESG and diversity and inclusion are subjects that a significant percentage of the population are interested in and focusing on, with some of the younger members of business and social communities being particularly vocal and engaged. Companies that want to recruit and retain talent, need to have a clearly articulated ESG and D&I strategy. It's interesting in the survey, when we asked the question of corporates, what are the objectives of your ESG and D&I strategies, the overwhelming best response was, make the business attractive to future talent, with over 49% of respondents saying that that was the key objective of their ESG and D&I strategies. As we move forward, whilst 85% of corporates said they had a clear strategy encompassing ESG and D&I, which will have appealed to the talent that they are looking to attract, only 28% had measures in place for both ESG and D&I. Going forward, employees or prospective employees are going to be increasingly demanding that organisations turn their strategies into reality.
That's a really helpful overview of what we're seeing. I want to turn the focus now to the organisations themselves, and the role that ESG and diversity and inclusion has in helping to create better restructuring outcomes. This is something you've explored in the latest report and the sentiment seems to be equally shared by both investors as well as businesses themselves. Steve, from your experience, could you bring to life a little bit more about why that's the case?
Sure Rowena, thanks. David has touched on a couple of bigger issues around attracting talent and securing future talent, so I won't reiterate those, but if I think specifically, it's often the case that in restructuring situations, be they in extreme stress or less distressed, no one has a crystal ball, you don't know what's down the track, sometimes what's even right in front of you. There is a need to act and react quickly to changing circumstances. In those situations, being able to draw on a properly diverse team with different skills, with different backgrounds, with different experiences is often absolutely critical, but key is being able to do that quickly, and not saying, well, actually we can source these skills next week, because next week may never come. That's something that all of us have seen through our careers. Specifically focusing on ESG, a recent example was a situation where, what would have been a routine refinancing, a group of lenders just rolling over their lending, became a very big issue when one of the bigger lenders refused to roll their financing, because of their own ESG policy around net zero. They just saying, ‘we are not going to lend.’ What would have, as I say, been a routine situation suddenly became a very big problem. Ignoring these issues could be extremely critical for a company.
Thank you, Steve, and David, very similar points from the priorities of investors but it will be interesting to get your perspective on how you think it's affecting them?
Rowena, it is really interesting. The survey actually brought out that 77% of the corporates we spoke to were intending on some form of debt raise or debt restructuring in the next 12 to 24 months. Actually, 60% said that they will be engaging in an equity raise over that period. The views of lenders and investors is going to be really important for the success of those activities. What we're seeing is that, whilst there is a significant level of capital available to be deployed, but it is worth remembering that often this capital is coming from pension funds and significant institutional investors, based in the UK and the USA. Those funds and institutional investors are being increasingly directive in terms of what they expect from the parties who are putting their capital to use. It's interesting, when we asked lenders and investors, why they would lend to organisations that had a clear ESG and D&I strategy. Again, over 44% of them said that the reason that they would do it is because their investors or shareholders would require it. We're also seeing that this is driving corporate activity and behaviour. We've heard Steve mentioned, the refinancing, we’re also seeing investors, requiring corporates to divest businesses that are no longer environmentally friendly, and also driving the social agenda by ensuring that there is greater board representation from all elements of society.
It's so helpful there to have a few of those stats and facts in the report, and to back up some of these behaviours. There's so much to consider here, isn't there, and a point of focus on our podcast is turning these big ideas into really actionable steps for our listeners. With that in mind, and Steve, maybe if I come to you first, what would you say are the main one or two key points that our listeners can really put into action around these topics?
Thanks Rowena, maybe just a few. As always, planning for the impact of these changes as we emerge from the pandemic into the new normal is absolutely key, but being specific, thinking about your business model what's core, what's non-core, what are you going to do with the non-core part, are you going to sell it, you're going to wind it down, etc., In late September, we are reading daily about supply chain issues, all over the country and indeed other parts of the world. Thinking hard about your new supply chain, and indeed how it is financed, and you are financed is key. It is unlikely that the bar on inclusion, and the bar on ESG is going down anytime soon, as more and more investors demand more and more around these arenas, so as that bar goes up, what are you going to do to keep up with it? Matching any commitments you made with practical steps is key, and in particular, how do you measure them. One of the issues we're dealing with a client right now is actually how do you quantify the impact of carbon reduction techniques that you're putting in place, how do you actually turn that into something that you can quantify rather than just think that you're achieving your goal. Whilst we all know that some boards are good at seeing the bigger picture, how are you going to drive that through the organisation so that every part of it understands and acts on these agendas.
Lots of great takeaways there Steve, thank you and David, how about you?
Rowena, it's quite interesting that the survey you highlighted, that D&I in particular, is becoming an increasingly important element of investment and lending decisions. Almost half of the people we spoke to felt that having a clear D&I strategy in particular, led to financial outperformance when compared with organisations that did not have such a clear strategy. It is important, just from a financial perspective, that organisations focus on that.
One of the other challenges that we are seeing in this room, actually and linked to something Steve has just said, is the issue around data, data quality, and as Steve alluded to, particularly, how carbon is being measured. Clearly, these will develop over time, but it is really important that the listeners understand some of the limitations of the data that is available to measure some of the commitments, in particular, around net zero, that have been given by corporates, but it's interesting that these issues are not limited to mid-market or smaller companies. We actually saw in our analysis of the accounts of FTSE-350 companies here in the UK, that actually only 4% of those accounts contain reference to their ESG commitments in the underlying assumptions in their financial statements. We've also seen that some of the larger institutional investors are really demanding greater transparency in terms of how ESG commitments are being measured. As Steve has mentioned, Rowena, the issue around data quality and transparency is not going away, and it is really important that corporates recognise that and grasp it.
Brilliant, thank you so much, David and Steve, really good discussion, lots of actionable takeaways for everyone. That's it for another episode of Business in Focus. Thank you to everyone for listening. If this conversation has got you thinking about how you can use restructuring as part of your recovery and growth plans, visit our website at pwc.co.uk/act-now-business-recovery, where you can find out more about the research we've discussed today as well as wider practical insights. Don't forget to subscribe to keep up to date with future episodes and please do join us again soon. Thanks everyone.