Is getting the data difficult?
Asset managers have so much good data in plain sight but the struggle is to accumulate it in a useful way. Sometimes we need to bring to their attention what they have as well as what they are missing. Sometimes it is eye-opening for managers to realize that so much of what they have already been doing can be incorporated into an ESG strategy. It is not all brand new. What is new is the increased interest in ESG issues, such as workplace safety, emissions control and hazardous waste.
How do you get over the issue of managers picking and choosing metrics?
Performance assessments are one solution. We can help companies benchmark one type of investment strategy against another and measure across their suite of investments. If you are a private equity firm with a sector strategy – for instance, in health care, tech or industrial products – there will be a common thread whereby we can produce comparable measurements. It’s vitally important that the manager understands where they rank amongst their peers. A manager may also be interested in measuring a managed portfolio in one industry against a separate position investment in another industry. Positive results can be showcased and marketed. Where results are less than ideal, it is a good sign when a GP is sufficiently self-aware to admit they failed.
There are ESG reporting templates out there from the Institutional Limited Partners Association, the Principles for Responsible Investment, Invest Europe and the Sustainability Accounting Standards Board. What impact are they having on standardization or validating measurements?
The two that are having the greatest impact on our client base are SASB and PRI. PRI puts out sustainable development goals, which encompass some key measurement targets, such as diversity, food and hunger, workplace safety, energy emissions – some of the core tenets that are consistent across a lot of different businesses
That is an easy framework to follow. You can advise using the 17 sustainable development goals in a way that is comparable to a heat map. Not every company is going to show brightest on every one of those initiatives, but they are most likely to have coverage on some of them and you can showcase the progress of one versus another.
There seems to be a conflict between generating some useful reporting metrics that are specific to a firm or fund that convey the impact of their ESG initiatives and generating something that you can benchmark against other GPs.
Absolutely. That is where the rubber hits the road. GPs have been focused on driving returns; now they have to drive returns as well as showcase an ESG strategy. Managers need to be sufficiently comfortable in their own skin to acknowledge where they are today regarding their ESG approach and to show their stakeholders where they want to go.
Some GPs work with their investor base to understand what their goals are and how they can help drive that strategy. For our clients in the middle market, the investor base runs the gamut from the largest institutional investors down to local high-net-worth individuals. Their priorities are very different. A high net worth individual may not care so much about a firm’s ESG approach.
Demonstrating a tangible link between ESG and value creation is a persistent challenge for all GPs. Why is this difficult?
A lot of our clients struggle with measuring ESG impact in a way that is useful to their business and stakeholders. As I mentioned, there is a lack of reliable ESG performance data today. In response, many consulting firms are developing their own measurement systems. Our approach is to work alongside the management team to develop measurement tools in a way that is no different from the assurance services we provide when clients ask us to help them with their valuation marks.