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The Data Opportunity: Takeaways from the 2019 Responsible Investment Forum

March 18, 2019 | News,

Former Anthesis Executive Director Don Reed attended the 2019 Private Equity International Responsible Investment Forum, where he was a speaker in a session entitled “ESG Data and Reporting: Making it Meaningful”. Here he shares his takeaways on the key themes of the event and his recommendations for taking action.

While one can’t quite say that the next horizon for Environmental, Social & Governance (ESG) in private equity (PE) is “all about the data,” it’s pretty close.  That was evident at the recent Private Equity International Responsible Investment Forum, the watering hole for private equity asset owners and managers focused on ESG.  Participants at the event struck a number of themes and most of them hinged on more ESG data that builds trust and yields insight on how to improve risk-adjusted returns.

The key themes from the event:

  • ESG in private equity is transitioning from anecdotal ESG to evidence-driven ESG. Most of the communications PE firms provide their investors emphasize case studies of the best stories about their best portfolio companies. While this helps, it is not the backbone of ESG action and communication. Investors increasingly expect data about ESG performance and value creation at the portfolio and portfolio company levels.
  • Asset owners are acting to systematically evaluate private equity firms based on data about their ESG integration. Asset owners and funds of funds (Limited Partners or LPs) have careful processes for evaluating potential and existing PE firms (General Partners or GPs).  Some LPs ask about ESG, but it’s been unclear what they did with the information and if it had bearing on the investment decision.  Most of the new and more data-intensive evaluations are still in the early stages, but the pattern is clear.  These frameworks and data will enable greater integration of ESG into the private equity asset manager selection process.  While still emerging and lacking standards for evaluating ESG integration, the transition from light evaluations of ESG integration to big LPs using their own processes is afoot.
  • Asset owners seek to express ESG impacts in terms of the Sustainable Development Goals. The SDGs are the new lingua franca of ESG, but data about how portfolio companies contribute to the achievement of the SDGs is lacking at every level. While there is mapping from conventional ESG metrics to the SDGs, there are many SDG Challenges yet to be addressed.

Is “data driven ESG” a set of buzzwords or the next horizon?

In the context of how most big companies are expressing their sustainability impacts in terms of performance data and pushing to outcome data, it’s pretty clear that ESG data isn’t faddish. Conference attendees expressed a range of points of view:

  • One big LP with a new and extensive process for evaluating private equity ESG integration said to GPs, “You have the ability to really dictate everything from A to Z, have complete transparency and insight into data that we can’t even get into public companies; you have the ability to influence outcomes.”
  • While this is true, it ignores two key points about our current reality:
    • Portfolio companies large and small, public and private struggle to gather and aggregate ESG data that builds trust and gain insight from it about how to manage for greater value and ESG performance.
    • Many GPs and LPs aren’t set up to receive such data much less apply it to their respective investment decisions. One LP said outright, “I don’t have any way to take more data on board.”

3 Recommendations for Harnessing The Data Opportunity

It seems we’re in the awkward adolescence of ESG data and integration.  So what do you do with the data opportunity? Here’s our three recommendations:

  1. Start by being clear what you think is the right destination. Decide what ESG data would be fit for your investment purposes.
  2. Understand where the “data owners” are in their journey towards having the right data that builds trust. Know that many portfolio companies may not already have the data you want, but you can get them started on their own journey.
  3. Develop a plan that takes you from where you are today to that desired destination.

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