Evan Greenfield: White Space

0:00Jenn:We have a view that in many respects, ESG is one of the last frontiers of value creation in a private market portfolio with significant wide open space. And that's because it's so relatively new. So in any sector that is so new in its approach, we try for a myriad of aspects to ensure that there is a leverage of this genre for return enhancement.

0:37Evan Greenfield:Welcome to the Future in Sound podcast. I'm your host, Jen Wilson. This is a podcast where we discuss people, planet, and profit. In each episode, we'll learn from world-leading experts who can help us see the future we want and our role in it.

1:03Evan Greenfield:This is episode 45, White Space.

1:11Evan Greenfield:Evan Greenfield is managing director and head of ESG for the private equity arm of the British Columbia Investment Management Corporation, also known as BCI. He brings extensive experience as both an investor and operator with the ESG and climate sectors. At BCI, Evan leads the integration of ESG factors across the private equity portfolio, aiming to minimize risk, enhance returns, and create tangible financial value. His leadership has contributed to meaningful improvements in the performance and resilience of portfolio companies through ESG-driven strategies. With$295 billion of managed assets as of the first quarter of 2025.

1:53Evan Greenfield:BCI is one of Canada's largest institutional investors within the global capital markets. Prior to BCI, Evan was Senior Managing Director and Global Head of ESG at S &P Global, where he oversaw ESG strategy, M &A, and operations. He also spent time at Joystead Bank's Asset and Wealth Management Division in the Americas. And prior to that, Evan spent over a decade as a private equity investor across the United States, Europe, and Asia. One of the many reasons why I invited Evan to join us today on The Future in Sound is that he's recently come out with a paper that I thought was really insightful, which he published alongside colleagues from Stanford called ESG Value Creation and Private Equity from Rhetoric to Returns.

2:40Evan Greenfield:Evan, I am delighted to have you on The Future in Sound podcast. Welcome.

2:44Jenn:Thank you, Jen. It's great to be here. I appreciate the invitation and appreciate you spending time to talk about the paper and whatever topics you have in mind.

2:55Evan Greenfield:Well, I've got lots and lots of topics related to this paper. I think it's a really good one. But before we get there, I'd love just a quick summary of your background and how you got into sustainability, Evan.

3:03Jenn:Well, I've started my career as a private equity investor several decades ago, largely focused initially on financial services investing here in the States as well as in Europe. And eventually I was doing investing activity in India after business school. And it was during my time in India that I recognized that we have the ability to leverage investing in primary shares in the private equity domain to have a tangible impact on societal outcomes commiserate with significant enhanced risk adjusted returns. And that was my first foray into the arena of ESG. And then I moved back to the States and joined Deutsche Bank to help build out the ESG and impact efforts for their asset and wealth management platform over a decade and a half ago, which was a very interesting time because there is very little focus and attention on this topic.

4:04Jenn:So it allowed for great experimentation and the development of new opportunities and new products within the ESG and impact domain.

4:12Evan Greenfield:It's interesting because a lot of the ESG rhetoric, I know we're going to be talking about going from rhetoric to returns here in a second, but a lot of the rhetoric really started to ramp up, you know, three to five years ago. How has your experience been of the shifts in ESG and sustainability over the past 15 years?

4:32Jenn:Well, there has been an explosion of interest in the topic over the duration of the last decade and a half, which is a real testament to the capability and to the abilities of this genre. But over the last several years, there's been an ideological and politicization as it pertains to sustainability and ESG. And one of the areas that we feel is so critical as we integrated in our private equity portfolio and one of the key elements of this paper is to demonstrate that irrespective of ideological, political approach and interest, putting that all aside, we leverage ESG at the core for value creation and to allow for enhanced risk-adjusted return for our clients or pensioners in the province of British Columbia, which is exceptionally important work to allow for those enhanced returns.

5:29Jenn:And we have a view that in many respects, ESG is one of the last frontiers of value creation in a private market portfolio with significant wide open space. And that's because it's so relatively new. If we look at the evolution of ESG in the modern sense, it really grew as an outgrowth to the financial crisis of 2008. and it was largely has been the domain of the public markets. It's not really until the last several years, perhaps five years or so, that the private markets have been integrating ESG with scale. So in any sector that is so new in its approach, we try for a myriad of aspects to ensure that there is a leverage of this genre for return enhancement.

6:17Jenn:One of the key aspects of the paper is to demonstrate that they can be quantified and fully attributable to these sustainability drivers, which is presented in the case studies that emanate from BCI private equities portfolio. But I think one of the aspects, and I would certainly encourage, and maybe I'm biased, I would encourage the listeners to read the paper because it's very much from a practitioner lens, albeit in coordination with my colleagues at Stanford who have provided a methodological review and enhanced it somewhat from an academic element. But what is so important to recognize is that we can leverage sustainability across asset classes, industries, geography, size, stage of company to enhance return in a quantified sense, which is why we've decided to highlight the case studies in our portfolio.

7:18Jenn:We've focused on three in the paper, but this stands throughout our direct portfolio. We're able to leverage these factors with full attribution and quantification of how it can impact and potentially enhance value.

7:31Evan Greenfield:It's really interesting, this idea of going after white space. Before we get into the case studies, Eben, I'd love to hear a little bit more about how sustainability integration works at BCI and how you go after that white space.

7:43Jenn:Well, let me break down a little bit of our program. So we run about 25 billion US dollars in private equity, half of which is allocated to leading GPs, investment managers, private equity firms as a limited partner. And the other half is allocated as a direct investor, potentially co-investing with our GPs, but certainly not always. And we invest across the broad spectrum on a global basis. And we're looking at opportunities in financial services, business services, industrials, TMT, healthcare, consumer, et cetera. So really across the landscape. And we initially have always said that we look to leverage sustainability for enhancing returns.

8:26Jenn:It's what we call our show me the money. And over time, we've been asked to demonstrate a framework. And I said, it's pretty straightforward. We look to leverage these factors for return enhancement and eventually dollars and cents gains. But we've been asked so many times that we actually presented a framework as to how we look to leverage ESG and sustainability in the investment process. And we break it down into three main stages. So in investment diligence, we're steadfastly focused on ascertaining the underlying ESG risks for the industry the company is operating in, and even more importantly, for the company itself.

9:07Jenn:And from there, to have an understanding of those risks, helping to quantify them, and to determine what we should do. Should we look to negotiation in terms of purchase price adjustment because of the risk that we've identified? Should we look at rep and warranties post-close? Should we look at operating leverage? Should we potentially step away from the transaction? So the inordinate time and the diligence phase is focused on understanding and assessing the material ESG risk. We're also spending resources to demonstrate the potential for value creation from an opportunity standpoint with management.

9:47Jenn:And that is mostly to set the tone and culture early that ESG can be leveraged for opportunities and value emanating from them. Post-closed, we transition to the extent the transaction comes to close. We transition from investment diligence, obviously, to value creation, which is an immensely critical stage in any private market investment. what you do between entrance and exit. Unlike other asset classes, we have the ability to really effectuate change and to really enhance strategy as part and parcel of the private equity investment process. The first aspect in that stage is cultivating a strong relationship with management.

10:27Jenn:We need to build the credibility, the trust, the buy-in from management to engage in these sustainability topics, largely because there's been such a definitional void as to what is ESG, which we can get into in a little bit. But we spend an inordinate amount of time with management. And we're doing a twofold process. One, we're still continuing to do that ESG risk assessment. Risk evolve and change over time. You also have the opportunity to understand the company with much greater detail, giving access to management, access to different information, and a much different perspective, obviously, relative to the diligence phase of the process.

11:06Jenn:We are then able to, once we ascertain some of these risks, our tools change somewhat from that earlier stage of diligence in the respects that they're fully operational, the transactional aspect has gone away. We're also spending a significant time ascertaining how we can leverage sustainability as a core part of strategy for the company, whether it is in product innovation, supply chain diversification, enhancing customer stickiness, operational enhancements. And what we are doing part and parcel in that process is the quantification. So we're tying in dollars and cents. The most important part is that management cultivation of relationships, and we're demonstrating the capabilities of sustainability by highlighting case studies throughout our portfolio of opportunities that have garnered economic return.

12:00Jenn:And finally, the last stage of the process is exit. And what we're trying to do in exit is ensuring that ESG and the associated financial acertones pertaining to it go from potentially the appendix of a confidential investment memorandum to the third or so slide. That ESG is demonstrated as a key part of strategy. It's utilized as competitive advantage and competitive position that's quantified, which we believe has the potential to allow for multiple expansion at exit emanating from those underlying ESG factors.

12:37Evan Greenfield:You mentioned, Evan, that sometimes there's a little bit of confusion for the portfolio companies around what ESG means. What did you mean there?

12:45Jenn:So it's not just the portfolio companies. There's confusion across the industry from those that are experts to those that are reading upon it as a lay professional. We did a survey of 20 heads of ESG at 20 alternative asset managers, and we asked them what on the surface is a very simple question. What is your definition of ESG? And what we received back was 20 different definitions of ESG. So it is astronomically challenging to expect investment professionals, members of portfolio company management, to integrate something that we don't have consensus as to what it actually is. What we've defined in the paper, in which is our guiding star at BCI private equity for our approach to ESG integration, is a definition of ESG.

13:34Jenn:And that is a collection of issues that have gained societal importance and therefore is relevant to business and highly important to our underlying portfolio companies. And those aspects change and evolve over time. And if that is the arbiter, then we can have much greater understanding as to what we're trying to do when we look to leverage these ESG factors. But what I believe is important to note is that in the process that we just discussed, This is not a cookie cutter approach to ESG integration. It's not as if one approach that works for one company in one industry or one geography or one stage of growth and development will work in another.

14:16Jenn:It's highly customized. The benefit of that customization, despite the work associated with that, is that it becomes a really core competitive advantage for that underlying company. And you can really demonstrate more significant economic gains attributable to it.

14:35Evan Greenfield:Hey, it's Jen. I just wanted to take a quick moment to let you know a bit about RICO and what we do. We're a tech-enabled advisory firm that helps private market investors and companies measure sustainability metrics using our software platform. We also help you to set targets and focus your efforts on sustainability areas that really matter for your business. And finally, we help clients to translate all of this work into your core value creation strategy or your business model. Check us out at re.co.com to get in touch. All right, now back to our conversation.

15:13Evan Greenfield:I'd love to get into the case studies here in a second. And so you walked through three different case studies in your recent paper that articulated not just within your portfolio, but the sharing with the wider market specific cases of creating value within your portfolio through sustainability. And I was really taken by the first case linked to the logistics and transportation company. I'm just wondering, Evan, would you mind taking us through that case study, what the situation was, and how you started to turn your mind to the identification and quantification of value? Sure.

15:53Jenn:So initially, when I met with the company, folks on management are very excited to send me ESG KPIs. I looked at it. I thought it was helpful in some respects. But what I came to understand is that ESG is a really dominant part of the company's strategy. We just needed to distill it and to frame it and to ultimately quantify it in dollars and cents terminology. But what we recognize is that the company in the transportation and logistics domain is steadfastly focused on what we've classified as a driver first culture. And that sounds somewhat intangible and ephemeral and not quantifiable. But when we spend an inordinate amount of time together with management to distill it, we're able to ascertain the economic benefits and the societal outcomes associated with it.

16:46Jenn:But first, I take a quick step back. Whenever we're doing an engagement, what we're trying to do is not so much focus on what management believes, as I said earlier, are the associated ESG KPIs. The first and foremost of any assessment is understanding the company, understanding the company's challenges, opportunities, competitive advantages, barriers to entries, risk opportunities for value across the board. And then our responsibility in the sustainability value creation realm is to ascertain how these macro tailwinds behind sustainability or climate transition may be leveraged by this company such that it becomes a core part of strategy, allowing for product innovation, supply chain diversification, customer sickiness, EBITDA growth, margin expansion, capital efficiency, and ultimately enhancement value at exit.

17:39Jenn:That's our goal. That is what we're trying to accomplish in the initiative. So getting back to case study one, once we were able to distill and understand the company's value proposition and the company's challenges in a much more dynamic light, which took significant amount of time and conversations, we distilled it the driver first culture. And so most of the industry of which the company operates in pays their drivers as per mile driven. These are truck drivers. What we do in our portfolio company is we pay as a percent of load completed. So that allows for much greater alignment amongst the company, the client, and the driver.

18:24Jenn:Drivers are incentive to complete jobs much more efficiently and much more effectively because they are getting a percentage of the revenue associated with that load, as opposed to incentive of driving more because that's how the industry gets compensated. Very important, you can ascertain a significant amount of strategy of the company by understanding compensation structures. This case most certainly resulted in that assessment. The challenge is that compared to the industry, we have much greater cost associated with driver compensation. In the paper, we discussed that it's approximately$23 million.

19:04Jenn:So that's certainly not a contribution to EBITDA. It's a detraction from EBITDA. But what we saw was that the productivity gains emanating from this driver first culture and this compensation structure and the downstream financial benefits greatly outweighed that cost of compensation. So what we saw was that we reduced the necessity for training and recruiting new drivers because we brought down our turnover rate. The industry turnover rate is approximately 90%. This isn't the UK definition of turnover. This is an employee coming and leaving within that year, that definition. And so we went from the industry average of a 90 % turnover rate to 60%.

19:51Jenn:So 60 % in itself sounds very high, but on a relative basis, it's an astronomical differentiator. So what we classified is that if there's about a$15 ,000 cost of recruiting and training new drivers, we have about 4 ,000 drivers. The Delta between 90 and 60 rolls up into about$18 million of avoided cost of training and recruiting new drivers. Another benefit accrues in the respects that our drivers are more seasoned and experienced. They understand our systems, our protocols, because they're staying with us longer as opposed to turning over. And what we found is that we have approximately a third less accident and injury rate than the industry average.

20:33Jenn:The economic benefit of that is that we bring down our insurance premiums from approximately 8 cents a mile, the industry average, to 5 cents a mile, to another$18 million of avoided insurance costs. And beyond that, we are recognizing that we're bringing down our emission profile. And most certainly, I think those in the ESG landscape may or may not say, let's electrify the fleet. Well, there's a couple of challenges with that. One, it's much easier to save than to execute. Two, you don't have enough charging network. Three, there's prohibitive cost to doing that at once. So certainly when new trucks are coming on board, they're much greater in fuel efficiency than more outdated trucks.

21:16Jenn:But to electrolyze the fleet is not a potential opportunity in the near term. And the costs are certainly prohibitive beyond the operational aspects. But because our drivers are focused on being as expeditious as possible to go from one job to the next, because that's how they're getting compensated, we brought down our emissions profile significantly. So we brought down our greenhouse gas emissions, but we also brought down our cost of fuel by around$8 million. Finally, from the opportunity side of the equation, for our clients that cure and have made public statements to enhancing sustainability in the supply chain, largely the big box retailers, we've been able to more effectively compete and win and expend business on RFPs by around$13 million.

22:03Jenn:So when we look at this in summation, we see that in all, there's approximately 144 potential uplift in enterprise value fully attributable to sustainability. Now, what we don't consider in the paper in this case studies is any type of multiple expansion that we believe may accrue to having a more sustainable company, not just because it's the word sustainable, but because it's a competitive advantage and there's economic gain, which we strongly believe may be the case. But we don't get into that discussion in the paper. We fully focus on operational value add and operational improvement. But as I said earlier, this case is very much tied to the transportation and logistics structure.

22:51Jenn:Our next case, as we look at a manufacturing company and our third case in the paper, focus on a specialty insurance brokerage, has very different undertones, very different characteristics. But the really exciting aspect is you can spend a significant amount of time understanding company, understanding management, leveraging and acquiescing those levers to enhance value emanating from sustainability with a very different approach relative to other type of areas of value creation.

23:21Evan Greenfield:It's such a fascinating example and almost like a plot twist, right? Because at the beginning of the story, it was, okay, we instituted a change that increased our costs. And if you're just looking at the superficial cost increase without doing some of the calculations around what does this mean for our turnover, a variety of other, you know, safety, a variety of other costs, you'd miss really significant value here, which is a fascinating outcome from this research and summary, Evan, from your work. And I'm just wondering, how does this look in practice? So with the transport company, how are the opportunities identified, for example, a thesis around, you know, paying for the percentage of the load delivered versus the mile traveled.