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Ambienta SGR SpA

PRI reporting framework 2019

You are in Direct – Private Equity » Outputs and outcomes

Outputs and outcomes

PE 14. ESG issues affected financial/ESG performance (Private)


PE 15. Examples of ESG issues that affected your PE investments

15.1. Provide examples of ESG issues that you identified in your potential and/or existing private equity investments during the reporting year.

Investment Stage
ESG issues

ESG issues

          Succession planning, human capital management and expansion
        
Sector(s)
          Industrial goods manufacturing in the agricultural and construction machinery.
        
Impact (or potential impact) on the investment

During the initial assessment, at the time of the investment decision, it became very clear to us that we needed to condider and handle carefully the transition from the management of the founding family to a more professional management style. At entry, the founding family (father and two son) occupied all critical position working around the clock with the help of a handful very limited managerial resources. This management narrowband represented a risk in terms of imminent growth, internationalisation of operations and eventually succession into the next stage of management bandwidth.

A possible impact could have been the failure of our plan to bring this company to be a global player (expansion into Japan and US) from a EU only footprint and a cut on its growth potential. But this did not happen.

What happened is that the company managed to deliver the investment case in 18 months instead of 4 years; it sucessfully expanded into US at the time of writing. Daily deliveries in 2 years grew from 120,000 Euro a day to 240,000 Euro a day worth od sales at no additional capex. This, thanks to increased focus and skills, clear accountability and increased motivation.

 

 

Activities undertaken to influence the investment and its response

The ego and the ambition of the founder family has been managed by migrating them to a senior advisory type of engagement with full alignment on economics and sucess with Ambienta.

At the same time, after having created clear functions, we selected and recruited a CEO and a CFO. With them, more managers were recruited or promoted to fill the entire C-level. Inside functions, operations, R&D and the commercial department were reinforced. Eventually 84 resources were added in 2 years.

A new comprehensive incentive scheme was introduced:

  • Level I = annual cash bonus based on individual and group KPIs (>30 employees)
  • Level II = mid-term cash bonus based on stay-on and group value (c. 10 employees)
  • Level III = co-investment (c. 5 employees)

As a result of the exceptional performance recorded in 2018, all employees were awarded with an extra bonus which was linked to financial and operational metrics. This long term foundation was totally missing before and performance was only rewarded at year end with no system in place

As a result the new management team fast de-bottlenecked operations and allowed to new growth at no capex. 



 

Investment Stage
ESG issues

ESG issues

          Unclear whether the supply chain was sufficiently well structured to be able to support the planned growth and its internationalisation
        
Sector(s)
          Industrial goods manufacturing in the agricultural and construction machinery.
        
Impact (or potential impact) on investment

The impact could have been disruptive where some existing component suppliers were single source and not capable to scale up at the same speed as our company and neither able to deliver with the adequate accuracy of lead times, especially internationally.

 

In reality the analysis lead to several benefits in terms of certainty of supply:

  • Creation of a new shared demand forecast model delivered 50% to 90% decrease in delivery delays (depending on each supplier).
  • 6 new suppliers qualified and introduced
  • Eventually, a cost reduction on purchased goods of approx. -5% (+2% overall EBITDA impact)
Activities undertaken to influence the investment and its response

This issue was framed in the Materiality Analysis and then framed with targets in the ESG Action plan of the company (step 3 and 4 of our ESG in Action programme).

Management decided to conduct a joint analysis with the top 30 suppliers. 

  • Each supplier has been investigated in its production processes and ability to scale operations and increase volumes and deliver them effectively without extra costs
  • The joint supplier’s and Safim's processes of forecasting, ordering, producing, stocking and delivering have been mapped, analysed and optimised for reciprocal benefit.
     
Investment Stage
ESG issues

ESG issues

          Supply chain management
        
          Supply chain management
        
          Supply chain management
        
Sector(s)
          Filtration equipment
        
Impact (or potential impact) on investment

In the first phases of our ownership we run a Materiality Analysis to understand which ESG issues have the highest priority among all issues. As mentioned before, our approach always prefers effectiveness over breadth of approach. One of the main issues for the company was related to the review of our suppliers of filtration equipment, especially some large private-label manufacturer based in Asia. We realized that there was not any audit procedure in place to verify our supplier compliance with neither any product liability standards or in terms of environmental or labour practice. This represented a significant risk in terms of reputation for our company.

Activities undertaken to influence the investment and its response

We decided to implement a formalized audit process to review our suppliers' adherence with our standards as set through the 3 Goal Setting policies in step 2 of ESG in Action programme.

The Company introduced a new quality management process in its key subsidiaries in Switzerland and Germany. The new quality management process not only comes with a formalization of various internal processes (ISO 9001 re-certification), but also with a step-up in terms of supplier audits, a key point that has been identified in the ESG Risk Materiality Analysis and addressed in the ESG Action Plan. The supplier audits focuses on new private label suppliers, and ensure a consistent process with uniform and comparable KPIs. In the course of 2018, management conducted several audits at private label suppliers (amongst others, the largest private label supplier based in Indonesia, as well as a major supplier from Turkey), all of which have been positive. Additionally, the Company also introduced a supplier check-lists for OEM manufacturers. 

 

Investment Stage
ESG issues

ESG issues

          Dust released in the atmosphere
        
Sector(s)
          Manufacturer of cement performance additives
        
Impact (or potential impact) on investment

In case of wind the raw materials ammassed in the plant, tens of thousands of tonnes of limestone (a natural raw material), could release dust which does not break any environmental law but may annoy neighbourhood.

The risk is that pressure from neighbours could eventually lead to a round of tightening on the environmental limits and make an outlaw of a a situation that today is instead within legal limits.

The result of our actions made such that less dust is released in case of wind

 

 

Activities undertaken to influence the investment and its response

In the ESG Action Plan of the company has been decided to invest in a set of sensors to mesure the quantity of dust that is realised into the air in case of wind.

The sensors have been purchased and installed.

As a result we now have measurement of the amount of dust released and we could understand under what circumstances this phenonmenon takes place and how to mitigate it. Matigation is through different and better handling of limestone in the plant and the costruction of some new dust barriers.

15.2. Describe how you define and evaluate the materiality of ESG factors.

The materiality of ESG factors is a crucial concept at Ambienta. Our ESG in Action programme is a five step approach to ESG integration from initial assessment to monitoring and reporting. One step, the Materiality Analysis, is fully dedicated to materiality. We consider this particularly important to us, but also to all mid market investment firms, since we and our portfolio companies work with small teams and therefore have limited managerial bandwidth. Prioritization of factors and issues is crucial in order to achieve real effectiveness. The Materiality Analysis is a throughout review of all company activities and operations. Its impact on all stakeholders run jointly by the company top management and Ambienta investment team. It draws from the evidences of the intial ESG assessment and due diligence, analyzes all identified issues and possibly new ones, defines top priority areas to be addressed first. In order to prioritize ESG factors the analysis assess materiality from the perspective of all stakeholders. 


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