‘Data is the bedrock on which all ESG assessments must be based. Without data, we are blind,” argues Christian Schütz, director ESG at German private equity manager Golding Capital Partners.
A growing cohort of infrastructure managers are undertaking data management projects to improve their ESG processes. Capital Dynamics, for example, implemented a proprietary ESG scoring methodology (R-Eye) in 2018, based on the 17 Sustainable Development Goals identified by the UN. Verena Rossolatos, ESG specialist at the firm, says that “data is imperative to the ESG mission”. Establishing a baseline allows managers “to set ESG-specific targets and define measurable indicators to track progress”.
As much as data is helping firms take great strides in their goal-setting and reporting, there is also a need for greater consistency across the industry. This is where benchmarking, such as the annual GRESB survey, can play a role. For one of former Deutsche Bank subsidiary DWS’s portfolio companies, “participation in the GRESB survey and the achievement of a relatively low score… resulted in the company prioritising ESG and significantly increasing their score over our ownership period”, says Lucinda Hearth, the firm’s head of ESG, infrastructure. DWS now conducts this gap analysis assessment upfront.
Likewise, Schütz supports the ESG Data Convergence Initiative, designed by investor association ILPA to encourage fund managers and private companies to disclose ESG-related information consistently via a standardised set of metrics and reporting mechanisms.
LPs can help. Paul Buckley, CEO and managing partner at placement agent FIRSTavenue Partners, says: “LPs are developing their own ESG targets and standards for ESG reporting and with time, we expect the institutional investor community to aggregate around defined targets and themes. For example, the ‘E’ in ESG targets will likely focus on greenhouse gas emissions, and the ‘S’ will prioritise livelihood creation.”
A trust exercise
Although the emerging ESG standards and benchmarks are clearly helping to set a precedent for the existence of meaningful, comparable data, the process of collating and then analysing that information is far from universally smooth.
For Buckley, “GPs will have to provide increasingly detailed and comprehensive ESG reporting… in a format where data can easily be extracted and aggregated so that the LP can demonstrate compliance with their own targets”. This is where technology has the potential to transform ESG practices.
Capital Dynamics, for example, uses artificial intelligence technology to flag ESG risks, which, Rossolatos explains, helps the firm to “provide transparent reporting to our investors”. This is also creating an opportunity for outside providers. As Schütz says, “without specialised technological solutions, the industry would never be able to generate and evaluate the enormous amounts of data points connected to ESG”.
Complex data evaluation aside, however, for GPs, even collecting data from their portfolio companies is widely considered a challenging task. According to affiliate title Private Funds CFO’s Private Funds Leaders Survey 2022, only 8 percent of respondents said it was “not challenging” to collect ESG data from portfolio companies. In contrast, 59 percent said it was “slightly challenging”, and for the remaining third the process was labelled “very challenging”.
With a stark need in the private markets industry for data support, several data providers and start-ups are looking to establish themselves and bolster their ESG-related offerings, and Schütz is “starting to see differentiation among those providers”.
He adds: “We expect positive momentum for ESG data start-ups who are able to provide added value compared to those merely acting as data consolidation conduits.”
LPs are driving the process. Hearth says DWS “receive[s] an increasing number of requests for bespoke reporting, both on a regular and ad hoc basis”.
As Buckley notes, “a number of fund administrators are developing the ability to reach down to the individual portfolio company level and extract portfolio company ESG data. This data can then be aggregated across an LP’s portfolio and ultimately lead to better fundamental ESG reporting to LP stakeholders”.
This kind of sophisticated reporting opens up other possibilities, with improved transparency a much-lauded benefit of a digital approach. Citing asset-level real-time carbon monitoring as an example, Minesh Mashru, head of infrastructure at Cambridge Associates, says “enhancing transparency has been a terrific development, and is becoming increasingly essential to institutional investors”.
The answer’s in the cloud
Software-as-a-service solutions are emerging to address the need for accurate and consistent ESG data
Launched by Greenstone, a global sustainability software solutions provider, InvestorPortal is one example of a cloud-based platform designed to improve ESG processes. The portal enables secure ESG data collection, in-depth reporting and analytics for private capital investors across investments and funds, allowing users to collect, manage, analyse and report performance and compliance data against a wide range of ESG criteria.
Built on a verifiable ESG question library, InvestorPortal facilitates questionnaire distribution, document management, scoring and KPI and metrics analysis.
Through dashboards, users can compare, benchmark and score portfolio companies on aspects such as environmental management policies and GHG emissions, linking questions to global sustainability frameworks such as the UN SDGs and the TCFD.
Christopher Walker contributed to this article.