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ESG data has been a hot discussion point for several years,
especially in an investor-driven market, where GPs continue to face
increased competition for the dollar. Investors are pushing for
more transparency from their fund managers in order to make more
effective investment decisions and monitor their portfolios.
More recently, we've seen an increasing shift in focus and a
maturity in the market space with managers focusing on responsible
investing for an alpha creation.
During the recent BVCA conference, I was privileged to host a
panel of industry professionals, who have a key focus and subject
matter expertise in ESG practices, and we discussed the operating
impact of ESG across the broader private markets eco-system.
SFDR (Sustainable Finance Disclosure Regulation) was top of mind
for the discussion. The ESG-related regulation that is being driven
out of Europe, focused on sustainability-related disclosures in the
financial services sector. Starting in 2021, and expanding through
2022, there will be new level of transparency requirements
on GPs, and this will significantly shift the disclosures
required by a GP as it relates to their underlying investments.
Some key observations below:
The focus of the legislation is to drive transparency;
ESG must be part of the investment processes and
sustainability risks are part of the decision making across the
firm. Data collection is important, however, there is a need for
GPs to be involved in the materiality assessment.
A broad stroke of firms already incorporate ESG data
practices into their processes. Collecting more data and
becoming more knowledgeable about the ESG elements of a firm's
portfolio will be important, not only for SFRD purposes, but other
standards such as TCFD (Task Force on Climate related Financial
Disclosures).
The value of ESG is crystalizing across all areas. Not only
because of regulation, but also due to shifting consumer
habits and employee expectations. This can help add to the
value creation story of our investments. It is not possible to
think of this as a tick-the- box exercise, as non-financial KPI's
are increasingly important as well as financial KPI's.
The pace of change in disclosure over the next 5-10 years is
ever-increasing. Moving from several years ago, where ESG practices
were very reactive, to the current time, where we have
regulation coming into place and a shift for more investor
transparency. Looking at the digitalization, automation
and speed of transparency trends, ESG has become an incremental
part. . These alignments will drive the focus of how PE (private
equity) funds can invest in companies that can quantify the
positive impact they have.
What you measure you manage… The impact of
technology and speed of innovation is helpful. Being able to build
information layers and dashboards for investment teams to help
manage their companies is better, as it is an important part to
enable firms to both monitor progress and benchmark vs peers.
Closing thoughts
The scrutiny placed on investment decisions by advisory boards
and investment committees has increased and with regulatory changes
coming, institutional investors require data transparency from
their investing partners for both financial and non-financial data.
As a result, GPs need strong tools to manage their data management
practices.
Firms need to be ready; if it's not today, it's coming down the
line. GPs need to be proactive and start working with portfolio
companies to target the information required. COVID has accelerated
many of the trends we are seeing not only on climate, but also on a
social front. Ensuring you have an ESG strategy and aligning it
with the investment process, will drive long-term value creation
across your firm.
ESG is not a single issue, it is about how companies operate,
their resilience, leadership, security, flexibility and climate
response.
To learn more about how our solutions can increase data
transparency for your investors ahead of formal regulations, connect with our
professionals.
Posted 19 October 2020 by Rishi Kotecha, Head of Commercial Strategy, Private Markets, IHS Markit
IHS Markit provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.
