Adding value to the business through corporate social responsibility
CSR can help leverage environmental, social and governance measures
Corporate social responsibility (CSR) can address a variety of factors for middle market businesses, including community needs, employee and customer preferences, mission enhancement and brand reputation. Some believe the strategy can also deliver significant business dividends.
For instance, as part of the CSR strategy, some businesses have incorporated formal environmental, social and governance measures, known as ESG, to demonstrate to current and would-be investors a commitment to ethical practices and sustainability. In turn, some investors use the ESG criteria standards to determine potential company valuation and investment-level interest by assessing a business’s environmental stewardship, employee, supplier and community relationship management, and how the company leads and governs itself.
So, how are middle market companies leveraging ESG measures? According to the RSM US Middle Market Business Index, 39 percent of middle market executives are very familiar or somewhat familiar with ESG criteria to evaluate the performance of their organization. Larger businesses are more familiar than smaller ones (52 percent versus 28 percent). Among middle market executives familiar with the measures, 83 percent use ESG to evaluate their own or others’ performance.
While ESG hasn’t fully made its way into the middle market, according to Michael Fanelli, RSM transaction advisory partner, he’s seen an uptick on ESG diligence within some middle to upper-middle market investors he works with. “Based on our conversations with middle market private equity investors and overall market trends, it does appear that the middle market is ready for ESG discussion and implementation,” he says. “I expect this to become more prevalent in the future.”
And on the sell-side of things, Marc Logan, RSM transaction advisory partner, says he’s seeing added interest related to ESG as well. “Leaders and shareholders of middle market businesses are hyper-focused on corporate culture, a component of which is social responsibility. To maximize value in a transaction, selling shareholders want to showcase the strength of the management team and the culture the management team has instilled in the company. We have not seen middle market companies performing sell-side ESG diligence yet, but we expect it will soon become a normal part of sell-side transaction preparation and a way to present the strength of a company to prospective investors.”
As businesses look to measure a variety of factors in terms of investor-readiness, growth and business valuation, ESG reporting provides another opportunity for some middle market companies to enhance their CSR efforts.
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