ESG: Are We There Yet?

The concept of investing under environmental, social, governance (ESG) principles has gone mainstream—it's even a recurring theme in editorial cartoons--yet private markets have been slow to adopt ESG reporting in their portfolios.

More recently, spurred by the EU's Sustainable Finance Disclosure Regulation reporting requirement, many private equity firms with European investors have been pursuing measures to improve transparency on a wide range of ESG metrics.

How much change has already happened in private markets regarding ESG? These and other topics were discussed as part of a panel at Interact, S&P Global Market Intelligence's annual conference on data, technology, and operations in the private markets. Alex Merola, Executive Director of ESG strategy in Enterprise Solutions at S&P Global Market Intelligence, moderated a panel of private market investment professionals to get their perspectives. Below are some of the highlights from the discussion:

The impetus for enhanced reporting

The combination of looming regulatory requirements and investor awareness is putting ESG front and center. One panelist noted an increased interest from European limited partners (LPs) beginning about four or five years ago, followed by a wave of inquiries from US-based LPs over the past year.

What's become most important over the last year is clarity and alignment, according to one panelist. Before the recent industry conversation on ESG, it was hard for investors and clients to understand what data mattered and what didn't. "Our LPs realized we had to do something, but had no idea how to start," noted another panelist. Investors are looking for specific metrics, and for information from their fund managers to match up.

Defining a data collection process

For private equity and venture capital fund managers, creating an ESG reporting program entails many steps: from defining what one information they need to capture, to making a plan for how to collect it from private companies in their portfolio. The panelists discussed how the industry is approaching that challenge, from creating annual ESG data collection surveys to mapping those resulting metrics to industry standard reporting.

The rollout of new ESG reporting for portfolio companies has proved challenging for participants given the need for data points that are often difficult to quantify. Moreover, there is an education process for portfolio companies in understanding these metrics. To that end, newer technology solutions like Novata have been refined and developed to solve for workflow challenges around ESG data collection and standardization.

Benchmarking is key

Finding comparable, standard metrics has been a key challenge in private markets investing. The core issue is trying to measure the impact of ESG factors—and the investment opportunities that can meaningfully incorporate these policies into company operations.

The panelists also discussed the related challenge of measuring how ESG factors can predict or influence financial performance. "To the extent that we can tie ESG impact to better returns—that's the holy grail," according to one panelist.

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.