Private markets investors have always defined their own ESG strategies and achievements. However, with the arrival of major new regulations, the industry is moving into an era where investors need to understand, collect and analyze ESG data in a more standardized way.
Setting sustainability goals, “net zero” promises, and other ESG targets across portfolios has never been more important. But the key challenge for investors lies not in setting and defining these commitments, but rather proving their success at an industry level through the collection of robust ESG data from portfolio companies.
The quality of ESG data collected is often patchy. Collecting data can be difficult due to the varied levels of understanding among portfolio companies about metrics and how to track them. Key metrics, such as carbon emissions or waste diversion ratios, cannot be simply collected overnight – the right infrastructure needs to be in place all the time.
Building the infrastructure
To collect robust ESG data, investors need to consider implementing strong governance frameworks, constructing solid request processes and investing in environmental, health and safety (EHS) software platforms. Strong governance is important for ensuring that ESG data is treated in the same way as financial data, for example, in terms of accuracy and completeness. Investors need to be comfortable disseminating ESG data to internal and external stakeholders, where it will be subjected to scrutiny and analysis.
At a more granular level, solid request processes improve data quality and storage. Investors should provide clear definitions of ESG metrics and simple collection templates, while data should be stored and optimized by portfolio companies on a daily basis. Finally, EHS software platforms enable portfolio company data to be tracked systematically across all environmental, social and governance metrics, and offer a scalable solution to then disseminate this data.
A hands-on approach
At the individual portfolio company level, investors will need to adopt an active, hands-on approach to put companies on the right path for collecting ESG data. Companies will likely be at different stages of their ESG journey, but all will need asset owners to support them. This is where the ownership model in private markets has unique advantages.
By holding controlling equity stakes, private markets firms can more easily drive change at portfolio companies, such as improving knowledge of ESG data at board and management levels, investing in software and hardware requirements to collect and store ESG data, and establishing governance standards.
Why all this matters
Through the successful implementation of sound data governance and collection processes, investors, boards and management teams can get insight into the progress of strategic ESG initiatives, which are proven to be significant for delivering long-term performance and achieving positive stakeholder impact. Robust ESG data can also be informative for establishing, assessing and avoiding risks that could have a reputational or operational impact on a business. For example, robust ESG data can help identify poor governance within a company’s supply chain and identify areas of the workplace where employee accidents are more likely.
As the number of investors collecting ESG data grows, firms will start interacting more often, sharing best practices and solutions, and this will support improvement in data quality.