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Market dynamics reflect a large shift of institutional money
towards ESG-focused funds, firms and companies. According to data
from Barclays, investment in sustainable assets has grown from $100
million in 2014 to more than $100 billion today. Meanwhile,
investment firms and their portfolio companies are increasingly
creating new roles, such as "Chief Sustainability Officer," to
support ESG within the organization.
As the focus on ESG intensifies, the evaluation and measurement
of ESG has matured. There is a heavy focus on returns, and the
requirements for data are getting more intensive as firms seek the
ability to analyze ESG in a more nuanced way and drive more
concrete insights into their portfolios.
ESG data sets are helping firms to gather insight into ESG at
their portfolio companies and thereby supporting them to make
data-driven environmental, social and corporate governance
decisions. However, the need to collect and report on significantly
wider and deeper data points is creating new challenges for
firms.
More data, more complex analytics and greater analysis required
at the portfolio-company level is creating new challenges for both
investors and fund managers. It is however also bringing private
equity closer to exciting new capabilities and providing more
transparency to a historically opaque asset class.
I recently participated in an expert panel of private equity
managers and technologists hosted by SuperTechnology North America
to discuss the impact of technology on ESG called 'Making an
Impact: Putting the 'Technology' into ESG.' In this post, I share
some of the insights gathered during this session.
Structuring ESG inputs
ESG metrics, like any other data set, need structure in order to
be usable and return meaningful metrics and actionable insights.
Firms that plan to prioritize ESG need to strengthen management and
analytic capabilities if they want to generate value out of the
metrics they collect.
Technology is helping firms bring more structure to the
collection, utilization and visualization of ESG data by providing
an inbuilt ESG baseline or framework that can be used as a starting
point. While every firm will ultimately want to track and measure
ESG in its own way, access to an inbuilt foundation to guide these
activities gives technology-enabled firms a head-start over those
that start the process from scratch.
Automating ESG data collection
The collection of ESG data is laborious and many firms are
asking whether the process can be automated. For the time being, at
least, the answer is, unfortunately, no. The vast variance in the
way firms and investors choose to quantify ESG metrics make it a
difficult data set to manage with automation.
The combination of portfolio monitoring technology, supported by
managed services for data collection, can, however, help to ease
the pressure. Our platforms can also streamline the data collection
process using reporting templates designed by our industry experts
that make it easier for portfolio companies to submit data to their
general partner. And finally, we are enabling our clients to
automate their analyses and measure a company's ESG impact against
its peers.
Regulatory vs. bespoke ESG models
ESG criteria are still highly interpretive and it's tempting to
rely on regulations, such as those imposed by the Securities
Financing Transactions Regulation (SFTR), to provide some guidance
around the ESG data points to collect. However, these regulations
are seen as a starting point only for most firms.
Overall, firms recognize that they need to go deeper than
checking a regulatory box. Many regulations remain
narrative-driven, requiring companies to attest to maintaining
specific policies—compliance and anti-bribery, for
example—without actually providing policy details or
quantifying their impact.
In particular, panel participants noted that measuring ESG
within a regulatory framework produces insular results. For
example, demonstrating that a portfolio company reduced carbon
emissions by 1,000 metric tons is meaningless until it is
contextualized against broader industry trends. The ability to
measure against peers and quantify impact is key and technology is
playing a role in connecting firms to that broader industry data so
that they can tell a compelling story.
Standardization of ESG metrics
While bespoke ESG metrics are desirable for many investors,
market participants are also open to the idea of standardized
metrics and benchmarks. Standardizing ESG is a massive task that
requires a large data set and deep domain knowledge across
businesses, but cracking that code could transform the capital
markets.
In the meantime, however, firms are looking for technologies
that can support a customized approach, with different metrics
being collected and reported on, depending on the unique
requirements of the portfolio company and investor. The ability to
extract data and quantify ESG flexibly and with granularity is a
key capability, enabling firms to maximize the value of portfolio
companies as they get close to the market. Firms are also
increasingly relying on technology to support the automated
generation of reporting templates that can be customized to meet an
investor's due diligence requirements.
Private market perceptions of ESG
In an audience flash poll conducted during the panel discussion,
89% of investors and firms agreed that ESG was a positive
development and 11% felt that its impact was neutral. Not a single
respondent considered ESG a negative.
Clearly, while the early days of ESG measurement in the private
markets present some new challenges, the industry as a whole is
enthusiastic about the trend and optimistic about its impact.
Overall, private market participants see ESG reporting as a trend
that will enable them to manage their money more effectively and
gain more visibility into a historically opaque asset class. We
couldn't agree more.
Posted 02 March 2021 by Alex Merola, Executive Director of Commercial Strategies, 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.
