Who’s in your Top Ten? – LP demands push decile rankings
Deciles and quartiles have been around for a long time and have been used to rank everything from hereditary traits …
The private market is ready for a technology solution to ease ESG reporting burden and to help investors focus on the objective of ESG integration – collecting and applying environmental, social and governance data to inform investments. A growing number of investors are acting on the recognition that integrating ESG factors into investing can protect and create long term value. Yet, the implementation of ESG integration has manifested into a reporting exercise whereby investors and fund managers are struggling with reporting burden. LPs have differing expectations, beliefs and policies about what constitutes a material ESG factor and how and when to report it. High volumes of data are being requested and there are doubts about how this information is used. It is prime time for investors to adopt a technology solution to ease reporting struggles and to help them focus on key risks and opportunities.
The concept of considering environment, social and governance factors in investing isn’t new. Early efforts were exclusionary in that investors screened out companies and funds whose practices did not support particular social goals. Its roots can be traced as far back as the colonial era in America when religious groups refused to invest in the slave trade. What’s new and significant today is the recognition that ESG integration is not a tradeoff between environmental, social and governance objectives and investment returns. There is a growing consensus that how a company addresses issues like energy efficiency, carbon emissions, toxic waste treatment, workplace safety, employee relations and corporate governance can prove as material to investment performance as traditional financial indicators such as price/earnings ratios and reputation with investors.
LPs are putting increased pressure on private markets to merge ESG metrics and goals into investment practices. Why? The top two drivers are (1) a conviction that ESG issues can impact long term returns and (2) to manage reputational risk. In the PwC Global Private Equity LP Dialogue 2015 survey, 88% of 60 LPs surveyed believed that responsible investment adds value to private equity. The United Nations-supported Principles for Responsible Investment (PRI) Initiative provides further evidence of LP influence. Of the 1325 PRI signatories, more than 500 of them invest in private equity, including more than 180 LPs. Significantly, 72% of 211 LP respondents to the 2014 PRI reporting cycle indicated that they are integrating ESG considerations into their processes for selecting, appointing and monitoring fund managers.
ESG means different things to different investors. Organizations including the AFIC, BVCA and EVCA are, like the PRI, conducting their own ESG initiatives to influence and participate in discussions about how ESG information could be collected and used. The inevitable result is our current circumstance: a plethora of differing approaches, reporting principles and standards from both investors and industry organizations. This coupled with uncoordinated collection of growing volumes of data has led to a reporting headache for LPs and GPs. Let us not forget the point of ESG integration which is not merely box-ticking but to use ESG information to make better investment decisions. The burden of collecting and creating reports takes investors’ focus away from this objective.
Today many investors use manual and disconnected tools like excel and emails to collect data and to monitor specific ESG risks. Just as technology has come to the rescue in other areas, there is an opportunity for a solution to automate and streamline ESG data collection, analysis and reporting. Currently ESG and financial data are collected and analyzed in isolation. Technology can bring financial and ESG data side by side, giving investors a holistic view of their portfolio. Today investors use in-house resources and industry resources to inform their ESG processes. A technology solution can offer a repository of industry guidelines and practices to help inform an investor’s approach for requesting ESG information and encourage consistency. Human judgment will always be required to analyze information and pick out key ESG developments. However technology help present the data in a way that allows investors to easily spot key risks and opportunities.
Do you have an ESG reporting headache? Consider using a simple and robust technology solution that is customizable to an investor’s beliefs and policies and that will evolve with industry developments.