Anthesis associate director, Ben Lynch, explains how the Energy Savings Opportunity Scheme and compliance landscape for private equity.
Compliance. The very word will often elicit an immediate negative response. It represents a distraction from core business activity; effort and energy that could be better invested in more rewarding pursuits. But what if we look at things differently? How can we turn regulatory compliance into competitive advantage? And in particular, how could the Energy Efficiency Directive (EED) and ESOS live up to its name and represent a viable business opportunity?
EED, ESOS and Private Equity
The risks to Private Equity firms in failing to comply with the European Energy Efficiency Directive are quite large. PE firms managing funds with several portfolio companies are often regarded as the ‘highest parent’ company, and therefore compliance risk sits with them. For many funds, this definition of highest parent also means that if one portfolio company is captured by the EED then all others are obligated too.
The highest parent could take responsibility for all the subsidiaries, or it could choose to disaggregate them: in other words, the cost of compliance can be delegated to portfolio companies, but the compliance risk will still sit with the registered fund.
The Compliance Criteria
ESOS, the UK’s interpretation of the EU Energy Efficiency Directive (EED), provides a structured basis to identify and realise cost savings across an estate.
Compliance is only required in the UK if a company’s operations met either of the following criteria on the qualifying date of the 31st December 2018:
Evidence of compliance is required by the 5th December 2019.
Other EU nation states have enshrined equivalent compliance criteria in law for companies registered within their jurisdiction.
For funds registered in the UK, including portfolio companies registered in other EU nations states, compliance criteria sit with the highest parent company within each EU country.
We believe that a comprehensive EED compliance program can drive savings to the bottom line, increase performance capabilities and eliminate reputational risk – and that the opportunity far outweighs the likely costs.
In the words of William Blake “A fool sees not the same tree that a wise man sees”
So, what are the benefits of Private Equity and Fund Managers taking a more active role in the ESOS compliance process?
The ‘O’ in ESOS
The first and most pressing one, is the ‘O’ in ESOS. ‘O’ is for Opportunity, not Onerous. The scheme is designed to get energy experts on to portfolio company sites to identify cost effective initiatives and projects that have double bottom line impact – cost and carbon. PE and fund managers have the ability to drive through the uptake of these opportunities and consequently realise the benefits
Progressive investors are now taking a far greater interest in the Environmental, Social and Governance (ESG) credentials of portfolio companies than in Phase 1 of compliance. Many of our clients are using EED regulations as a tool to manage sustainability risk across portfolios, raising standards in carbon reporting and energy management. If you or your portfolio companies are going to have to spend money to comply, seize the opportunity to identify and implement cost-effective improvements.
Improved Data Management
EED compliance has been a catalyst for improved information governance, data analytics and reporting, offering valuable insight into operational efficiency. Data management and record-keeping has significantly improved for many of our Phase 1 EED clients, supporting better decision-making on energy consumption and costs. EED also provides an opportunity to carbon footprint your portfolio and enhance your ESG program.
Failure to demonstrate compliance can lead to a loss in consumer trust and damage to brand reputation. This is particularly acute for ESOS where non-compliant companies are published by the Environment Agency and subject to a hefty fine. Consumers are placing increasing emphasis on a company’s environmental impact and are more likely to purchase from companies with sustainable habits.
We have worked with several funds operating across Europe to understand compliance requirements. Our geographic coverage allows us to manage compliance across all EU nation states, ensuring that local companies are compliant in their respective regions.
We use Chartered Energy Engineers for all our site work which has led to our client’s project implementation rates being significantly higher than government-reported averages. We also apply business thinking to procurement and delivery, encouraging our clients to aggregate projects and secure better contractual terms from suppliers. In doing this, we have been able to negotiate a packaged program on behalf of one PE client for lighting, BMS and boiler upgrade works that reduced the capital cost of installation for all
We’re committed to realising the opportunity beyond compliance and we want to work with clients that share this vision. For further information, get in touch using our fill out form below or download our short guide, Navigating ESOS and EED as a Private Equity Firm.