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As ESG becomes mainstream for investors, demand grows in private
markets for ESG disclosure and reporting standards
Environmental, social and governance (ESG) factors have
continued to move from the fringes of the investing world to a
priority topic. Most recently, ESG has become vitally important to
investors and fund managers in the private markets.
In 2018, IHS Markit explored the impact of ESG across private
market investments and fund types, including multi-strategy groups,
institutional advisors and fund of funds.
By conducting a series of interviews, meetings and roundtables
with global investors and international organizations such as the
UN's Principles for Responsible Investing (PRI), we assessed how
private market participants view the challenges and opportunities
in ESG. Our findings are published in The LP Footprint
Project, a proprietary study analysing 163 LPs across Europe,
Asia and North America.
From our research, three trends are clear in private
markets:
1. ESG reporting is on the rise.
The LP Footprint Project found that 63% of limited partners
(LPs) researched have public ESG policies, 59% have self-selected
to be signatories with PRI and 40% publicly publish annual ESG
reports, with the number rapidly growing.
A recent PEI report based on a global study of 101 institutional
investors corroborates our research, reporting that ESG is a
consideration for 85% of LPs throughout due diligence on PE funds,
but only 19% agreed that general partner (GP) investments strongly
reflect their ESG policies.[1]
Our research found a growing number of GPs are beginning to
close that gap by choosing to track and report ESG metrics on their
portfolio companies' operations. At our 2018 client conference in
London, 67% of attendees confirmed that they collect ESG data.
ESG reporting is seen as a way for firms to differentiate
themselves from other GPs with similar investment theses
pre-investment and to increase transparency to investors
post-investment. Of our 2018 London conference attendees, 28%
reported the drive to collect ESG data was a responsible investor
initiative, 10% in preparation for a fund raise and 57% for both,
paired with existing investor requests. As a result, portfolio
companies face increasingly requests from GPs to provide ESG
metrics during the due diligence process and throughout the
investment period.
2. All participants see value in ESG
reporting.
Through roundtable discussions in 2018 with 17 private market
firms, we confirmed that LPs and GPs alike derive three major
benefits from ESG reporting.
Managing Risk. As materiality concerns go
beyond financial data, ESG metrics enable a more in-depth
assessment of risk. Assessing ESG factors during due diligence
flags potential risks to monitor throughout the investment
period.
Drive Value. The practice of ESG reporting can
be an indicator of strong corporate oversight, controls and a
commitment to transparency, which combined with assessment of ESG
metrics themselves have been correlated in many studies with
potential for excess return.
Differentiation. As LPs prioritize ESG, GPs
tracking and reporting on portfolio company ESG metrics can produce
reports to demonstrate to investors their commitment to driving
better financial performance as well as supporting social or
environmental improvement benchmarks.
Here again, other research corroborates our findings. A Morgan
Stanley survey of 118 large institutions showed that 78% of
investors identified risk management as an important application
for ESG data and 77% of investors identified return potential as an
important factor in ESG-driven investing.[2}
3. Better tools and guidelines are needed.
In recent years, the private markets have made great strides in
improving transparency and reporting capabilities, but more is
needed to support ESG objectives for investors and investment
managers alike. Our research shows that new tools and guidelines
are two areas where leadership is most required:
Guidelines on ESG metrics will help LPs and GPs
determine the data that needs to be requested and reported on
throughout the investment lifecycle. GPs and LPs reported there are
multiple consortiums and organizations aspiring to outline standard
processes and metrics. Nevertheless, no set reporting standard for
portfolio companies has come to the forefront globally for private
capital markets.
Tools for collecting and analyzing ESG data are
needed to help GPs be efficient in collecting and integrating these
additional data into their existing portfolio monitoring and
reporting processes.
ESG adoption is on the rise in private
markets
Interest in ESG continues to grow in the private markets and our
research indicates that all market participants, including LPs, GPs
and portfolio companies, are looking for more direction and support
that enables them to integrate ESG metrics into their existing
workflows. In 2019, we will continue to facilitate collaboration
among private market participants and build on and share our
findings to advance ESG research for private capital.
[1] PEI Perspectives 2019 Special
Report, December 2018
[2] Morgan Stanley, Sustainable Signals
Asset Owners 2018 Survey, June 2018
By Sarah Broderick, Associate Director for iLEVEL at IHS
Markit
To learn more about ESG data collection and reporting tools, or
for a demo of iLEVEL's ESG capabilities, email PCMGlobalSales@ihsmarkit.com.
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.
