Jane: Hello and a very warm welcome to the Sustainable Growth Show with me, Jane Goodland. Every episode, we talk to leading experts around a range of topics across sustainability, business and finance. And today I'm joined by a very special guest. It's the author of a book called Green Gold, and I have it here. I welcome Michel Driessen to the studio. Good to see you. Thank you so much.
Now. You are here in your capacity as an author, but you are a very, very busy man. Please tell me kind of about your career, past and present.
Michel: Well, first of all, thank you for having me, Jane. It's a real pleasure. My background is transactions and restructuring. I've worked in industry. I work for professional services. I work for corporates. I work for private equity. The last 18 years I worked for EY, where I was a senior partner of the transactions group. And since I left the EY roughly 18 months ago.
I've been building my portfolio of activities, which is around three pillars, and all three pillars are really my passions. The first one is around Arts, where I'm at trustee of Turner Contemporary. The second one is around business, where I hold a number of Neddy positions, and the third one is academia y academia. Because academia is really important to act as a bridge between business and academic world.
And that was also the reason and the trigger to actually write the book Green Gold: How Sustainability Creates Deal value.
Jane: Excellent. And so you actually wrote this with your co-author, Sebastian Schmidt. I'm curious to know, on top of that very busy schedule, why did you feel compelled to write this bit? What made you think, okay. There's a there's a; there's a need for what we have to say.
Michel: Well, besides the fact that I'm personally very passionate about sustainability, we noticed that there is not a much literature around sustainability and financial value. And I really want to emphasize sustainability in the context of financial value. You can read about sustainability in a lot of books and a lot of literature, but not the link of financial value and sustainability in transactions.
The second reason is that the topic has become quite politicised. The third one is there's a lot and complex regulations, which makes it not easy to understand. And then the last reason is it's about rating. It's about understanding sustainability at a granule detailed level. And that was not available at the moment.
Jane: I'm always actually curious when I speak to authors. I don't really understand how a book becomes a book. So tell me, what was the research process like from? From the from the beginning, the genesis to the completion?
Michel: Well, I had a big advantage that I've been lecturing this module for the last four years. And so a lot of the content of the module are used for the book, and which normally starts with a concept. So I knew roughly what the topics would be and what the chapters therefore would be. Did a lot of research, did a lot of reading about what about this topic, but also we had a quite broad interview process, and we spoke with a lot of people varying from private equity to corporate regulators.
So it gave us quite a broad overview of the topic. Then we wanted to keep a practical. So we as you will see, we have written quite a number of case studies and it's a practical book. The audience for us was people who are interested in the topic from a financial perspective. So that could be the financial community and also the financial analyst. Main reason for writing this book was to get it also to the mainstream, so that the financial analyst and, and the street and the city actually start to understand this and can actually, frankly, put it in the spreadsheet.
Jane: So the book obviously does zero in on financial value of sustainability, and that's why we're particularly interested. But it also draws on your kind of background around M&A and deal making and private equity. So there's a lot in the book which focuses on that kind of element. But you also introduce this concept around the ESG value bridge. And I must say in an industry that is, is, is well known for its kind of plethora of acronyms and kind of naming conventions, we introduce a new one, the ESG Value Bridge. So what is this thing and why should we be interested?
Michel: What we try to do is to look at the connection between financial value and ESG factors. So to what extent do the ESG factors influence the financial performance of a company, especially in transactions? So we looked at cost of capital. We looked at the multiples, pricing multiples, though they give a connection, they're not making a clear causation effect.
And one of the reasons, so they're good measures. But one of the reasons we didn't feel they were appropriate enough was because they were based on the ratings of the rating agencies. And the downside with that is it only stays at an aggregated consolidated level of a company. If, however, you're interested in a business unit or a specific operations of a company, especially when you look at carve outs, etc., you really need to go to the next level of detail.
That's the reason we introduced the ESG Value Bridge, which actually identifies the ESG factors and what they will do in terms of financial performance if you approve them. So you frankly isolate them within a business unit. You focus on these factors. You calculate through what the cost investment would be, what the revenue investment would be, what that would lead to from a financial performance.
So the ultimate aim of the bridge is actually to calculate through what it means in terms of EBITDA or free cash flow. By doing that, you have the opportunity to go to a level of detail, which is really important to actually make the case that if I would invest 1 pound in an ESG factor, would that give me a multiple of two?
And as I said, we didn't think that the cost of capital could do that. We didn't think that the price multiples could do that, hence that we came with the ESG value bridge.
Jane: Interesting. But I'm curious to know, based on your research and your many interviews and your experience in the sector, is what you're arguing for, is that happening in practice, this quantification of ESG risks and value creation? It sounds great, but is that really happening in your experience, or is there a sort of spectrum of activity?
Michel: Well, first of all, I think for a private equity firm to get a good understanding of a company, they also need to understand whether they can get the lending. And therefore, what normally is happening is there is an interplay between the lenders on one hand, private equity on the other hand, and then and then the potential seller. If you are interested in a business unit of a company and you know that rating agency is only giving you a rating of these factors at a consolidated aggregate level of that company, that is not good enough.
So what private equity normally tends to do is to go to the next level of detail and do a materiality assessment. In other words, what are the really key issues from an E, S and G perspective. Read them, ranked them and put the financial number against it. But at the same time, they're also asking themselves a question. And how mature is the organization if we're going to acquire the organization, how much is that organization to actually deal with that?
How can they address these issues? How much investment does that cost us is then actual revenue opportunity or not? All of that will then be put together at a quite granular level, will go into the investment case that will go to the investment committee. The investment committee will make their assessment whether this is an interesting opportunity, whether it gives the normal rate of return, and that is then how the private equity will engage them with potential seller.
Important is, of course, is also that they have an obligation to the lenders. Lenders want to see that they have done their homework that have looked at all the issues, because there may be a liability issue or litigation issue in the not too distant future coming out of that. If they haven't done that. To answer your question about where are they on the spectrum, it very much varies by transaction. It very much varies about the time pressure, the availability of information, the level of granularity of the information. So most private equity will do what I would call ‘check the box’. It's making sure that the compliance is there and others will go further, will look more and more at the value creation. And that's the spectrum we have seen in due diligence as well from an ESG perspective, if private equity is that they are moving more and more from a compliance perspective as a base to a value creation and revenue growth perspective on the other hand.
A good example in the book would be a global private equity firm which is interested in acquiring a business unit of a global FMCG company. And in order to make that deal happen, there is an interlock between the investors, the private equity company and the seller.
And what we explain in the book is that that works actually really well, because the investors would like to see that certain topics and certain factors and drivers which have an ESG impact are actually are identified, addressed, and also will be mitigated with once the private equity firm will become the new owner of that business unit. And the reason we use it in the book is, you see, therefore, three parties in interplay, all working towards the same objective, is to addressing not only the issue, but also make sure that there is a financial return on it but there's also a good impact from a sustainability perspective.
Jane: And in that example, the topic in question you're talking about is around palm oil, am I right?
Michel: That is correct. Yeah, yeah. And palm oil was seen in the past as good. It's not seen it anymore as good. But and what we want to say in the book as well is yes, you can say palm oil is not good and therefore we need would need to deal with that. But we should also be mindful of the economic consequences and implications it has, because palm oil is produced by small and medium sized businesses, ‘mums and pop ‘shops in a in a country in Asia. And just saying we're going to stop that. We'll have huge economic implications there as well. And the message I want to get across as well in the book is it is not that straightforward. Always. There is much more shades of gray than just black and white and saying, if we do this, that will be the outcome. It is quite often the trade off as well, and a balance you need to find between financial returns but also economic implications.
Jane: Yeah. So a really holistic detailed analysis is needed.
Michel: Yes. But at the right detail level.
Jane: Yes. You said you did many interviews as part of this research process for the book. In the context of private equity firms, do you think that this practice of granular analysis and valuations is common, would you say, or is this is this patchy at best?
Michel: I think there is. There is a spectrum. There's a spectrum from compliance, which everybody does because you have to do it. We call it in the book ‘check box exercise’. So everybody will have done that from a pure compliance perspective. Where the real opportunity is go to the value creation opportunity and the revenue growth opportunity. Are all private equity firms doing that? Not always.
So I think at the moment what we see is everybody will do the compliance side, but we also see at the moment that more and more companies will go to the value creation side, because there are also untapped additional income opportunities, which quite often are not understood or not being identified yet, which is now becoming more and more to the forefront.
Jane: But presumably this also relies on access to information and data as well as time and kind of expertise, doesn't it? So is there a sort of a limiting factor here about the kind of the amount of information that would be available, potentially in a deal scenario like that?
Michel: It's a number of factors. One is the time pressure, right? Second one is this an auction? Is it a competition? And how keen am I to really get my hands on this asset. And the third one is the availability of data. And if the ability of information, but also at the right level. So sometimes you have to make estimates if the information is limited or not forthcoming, or sometimes even not existing, especially when you deal with companies which operate at a number of geographies, a number of product lines.
Michel: So you will not always have the access to the information. So quite often you also have to take a step back. Ask yourself the question, is this material? Do I need to focus on it? You normally do that through a red flag report where it really focus in on the must understand issues and try to do it in the time available.
Jane: Yeah. So we've talked a bit about value creation and the role of sustainability in terms of that financial piece about kind of adding value. I'm curious to know your thoughts around flipping it around a bit in terms of thinking about. Well, on the other side of that is value destruction. Perhaps when an organization doesn't quite get sustainability right.
In your research, have you come across that? Is there any evidence of there being a downside on financial value destruction, if you like, either in a sort of an M&A deal setting or even a sort of a public company when perhaps it goes a bit wrong?
Michel: Oh, absolutely. And it just shows how important it is to get it right, because when we talk about value, both from a creation perspective but also from a destruction perspective, we're talking about a multiple group of stakeholders. We not only talk about the shareholders, we talk about communities, local communities, regional communities. We talk about customers. We're talking about employees. We talk about regulators. So it has quite a profound impact. And let's not even talk about the financial lenders, pension funds, insurance companies. So if you get it wrong it could be going wrong substantially. For example, it will have impact on your share price if you're publicly quoted company. As we both know, the markets are quite emotional, and analysts quite often respond to headlines.
An example in the book we're talking about is a global apparel company, which did get it wrong, lost a lot of market share and still haven't recovered from the share price they had before, and also made a huge error in a number of things which had a profound impact on the reputation. So it does cut both ways, both from a value creation perspective and very destructive perspective. Absolutely.
Jane: So I guess the motto story here is it's not just about kind of, you know, what this could add to your business. It's really important to be managing kind of the downside risk perspective as well.
Michel: Yes.
Jane: And I guess from a private equity analyst perspective, both sides of the coin are they equally important do you think?
Michel: I think they are equally important. And the other lesson I would take from it is you need to dig deep. It's not always what you see is what you have. And that's the reason why due diligence is so important, is there may be a number of different points coming out of the woodwork. Once you start looking into more detail in it
And in the case I'm just referring to, that was certainly the case. And that's also the reason why I made the point previously about rating agencies. If you stay at an aggregate and consolidated level, but you really are interested in a business unit or a specific operation or part of a company, you really have to go to the next level of detail.
Jane: Yeah. Management teams running businesses, whether they are kind of looking for any sort of trade sale or whether they're part of an M&A or they're listed already. Is it fair to say that those management teams should be alive to the kind of the most material factors for them in terms of future cash flows and kind of long-term business strategy? So that's something that investors can engage with them on?
Michel: Yes. And mostly they are. But sometimes there are factors which are either not taken into consideration because of time pressure or because they haven't thought about it. And that is as important as well.
Jane: I suppose there's also something here about kind of the nature of ESG ratings that you cover in the book. Often, they are backwards looking. They're based on sort of previous years information as well. So they can be a signal and an indicator, but not necessarily kind of real time. Is that fair?
Michel: That is very fair for us. Rating agencies are very important, but they only give a baseline. They only give a reference point. They give a starting position because the challenge is that are a number of different rating agencies. They're not comparable. And the output you get is the information which is being inputted. And that is not always complete and comprehensive. And therefore our view always is use it as a baseline, use it as a reference point. But then you need to do the next steps to get a real understanding of the issues and the factors which are cost and revenue drivers, which are at play at a company.
Jane: Coming from a market infrastructure and data company myself, I would observe that we are seeing a sophistication of those data sets becoming more and more available over the years. I think we've seen them maturing and becoming more specific. Certainly, around the climate issue, we see more and more kind of specific data around, say, physical climate risk or kind of nature now becoming kind of more of a common data set.
So I'm with you on the data needing to be a bit better and, and kind of using analysis to overlay. That is really important. Okay. I have time for one more question. I think let's put you in a time machine, you and Sebastian in a time machine. There's a thought. Let's think about in 2030. So not that long off weirdly.
What do you think if you're updating the book, let's say, you know, the book's been out for a while and it's a top seller, but you think it's time to update the book in 2030. What do you think that that update might say, or what do you think you might be saying differently to what you say in the book today?
Michel: Our anticipation would be that the book will talk more about AI and the impact of AI, stroke technology on sustainability and financial performance. Our book would hopefully talk about the fact that the financial analysts have taken whether it's the value page or any financial measurement in their spreadsheets, and therefore it has become more commonplace, like you've got with R&D or sales and marketing, which people really can understand.
We hope that the regulation has become a bit more transparent and simpler, if I may say that, and that there is a comparison of the rating agencies. So therefore the baseline becomes easier to understand, the data are more consistent and comparable. And therefore in order to do due diligence, you can do it more effective, more efficient, especially if you have comparable data, detailed data and you can use AI.
Jane: Interesting. Well, let's see if you need to update the book in 2030. Thank you so much for coming and sharing your insights. And I think it's a fantastic book and I wish you all the best with it. Thank you very much, Michel.
Michel: Thank you.
Jane: Well, I'm afraid that's all we've got time for. Thanks very much for joining us. And if you did enjoy it, please don't forget to follow us and rate us on Spotify, Apple Podcasts or any other platform you use. And of course, YouTube as well. And if you want to get in touch with the show, you can do so by email at
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That's all from me. See you again very soon.
