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Key Takeaways: The Operational Impact of ESG and Future Data Management Practices

19 October 2020 Rishi Kotecha

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.

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