CLIENT E3 HOLDING SE

ESG Due Diligence – the case of PEMA Vollkorn-Spezialitäten GmbH & Co. KG

CHALLENGE

Reliable assessment of sustainability opportunities and risks in the environmentally exposed food sector

As an industrial holding company, E3 Holding invests for an indefinite period in companies in selected sectors, including the food segment, with the aim of creating long-term value. Few industries are as fundamentally linked to environmental and social issues as the food sector. Issues such as climate, biodiversity, water and soil quality, as well as health and animal welfare, are strongly influenced by the activities of companies in the sector. And conversely, these issues also affect the financial success of businesses – with increasing dynamism due to rapidly changing conditions.

This makes it all the more important to identify and analyze company-specific strengths and weaknesses, as well as the associated opportunities and risks, in a reliable and forward-looking manner: As a basis for successful long-term investment decisions. This was also important to E3 Holding in the run-up to its investment in PEMA Vollkorn-Spezialitäten GmbH & Co. KG - a traditional Franconian company specializing in the production of high-quality bakery products, positioning itself with ecology and health as integral parts of its brand essence.

 
SOLUTION

Conducting ESG due diligence that takes into account both E3 Holding’s sustainability investment criteria and the key environmental and social challenges and opportunities in the industry

Many environmental, social and governance challenges apply to SMEs regardless of their specific business model. The decisive factor for the added value of ESG due diligence, however, is the targeted addition of industry- and company-specific perspectives, in the case of PEMA, for example, the origin and cultivation methods of the plant-based raw materials, the logistics chain, the energy efficiency and climate impact of the ovens, and the type and volume of packaging materials used.

For ESG due diligence, the topics and specific assessment indicators are weighted according to materiality: On the one hand, this enables a broad analysis of the company’s sustainability position at the time of an acquisition. On the other hand, the most relevant and financially material risks and opportunities can be identified in a targeted manner and recommendations for action can be made for the period following the potential acquisition of the company. The analysis is based on information provided by the company, media and stakeholder research, and a site visit including interviews with management.

The status quo analysis of PEMA was conducted taking into account the requirements for portfolio companies formulated in E3's ESG strategy. The DD Report to E3 therefore provided a transparent overview of the measures and structures already in place at the company and where action was needed. In addition, red flag issues were analyzed, e.g. with regard to the exclusion criteria for investments defined by E3 and indications of problematic management deficits (e.g. high accident rates and employee turnover, and reputational risks due to inadequate supplier standards).

The red flag analysis also included the evaluation of scenarios for changes in PEMA’s external environment: for example, stricter regulation of agriculture to reduce harmful effects on the environment, control of purchasing behavior through graduated VAT rates, and forecasts of rainfall trends in the rye-growing regions from which PEMA sources its raw materials.

Typical ESG due diligence process

IMPACT

Reliable information base for E3’s investment decision and the strategic fields of action for PEMA as a new group company

In conjunction with the other due diligence areas (financial, commercial, legal, etc.), the ESG due diligence of PEMA has enabled E3 Holding to gain a comprehensive picture of the company’s material opportunities and risks prior to the investment decision. These play a central role in the food sector with regard to environmental and social aspects and must be accurately assessed in order to minimize credibility risks, especially for a company such as PEMA, which positions itself through its environmental and health credentials. In addition, the due diligence summary report provides a comprehensive basis for proactively managing PEMA's environmental and social value drivers from day one.

More information is available here.