A free digital tool that helps private equity firms integrate ESG into their investment processes is hoped to boost the sustainability performance of a market to which financial institutions have huge exposure.
The Investor ESG Toolkit was created by UK-based sustainability consultancy Sancroft to help PE firms identify how their investment and risk strategies stack up. By highlighting firms’ position on their ESG journey, the toolkit helps guide them on how to improve their integration processes with emphases on data gathering and management, data analysis, ESG performance disclosures and regulatory compliance.
The interactive PDF was unveiled in the past week and its creators said it helps to fill a gap in the ESG technology market for private investors.
“So much of the broad ESG integration story in financial services takes listed equities as its starting point and its fundamental assumption,” Sancroft chief executive Judy Kuszewski told ESG Insight. “It’s talking about big asset owners picking and choosing public stocks. The scale of it and the techniques don’t really map very well onto the private markets.
“That’s why we are offering this for free. We’re hearing a lot from our clients that many of the ESG tools available aren’t really aimed at them.”
Growing Interest
Data and technology providers are increasingly focusing on the private investment space as sustainability goals permeate through all parts of the financial system. Private equity accounts for about a quarter of all institutional investments, according to PwC, which also estimates private investment into European ESG assets will total €1.2 trillion by 2025, 42 percent of total private market assets.
The companies in which PE invest tend to be too small to fall within the scope of recent ESG regulations, which typically focus on reporting from large and listed companies. But as disclosure laws gradually pull lower-tier businesses into overseers’ gaze, and as consumers and investors broaden their demands for ESG-aligned assets, PE firms are having to perform greater due diligence on the sustainability of their holdings.
Kuszewski said that PE firms were being excluded from the ESG project despite being well suited to it.
“Private equity, as a model and as an approach, aligns very neatly with an ESG mindset,” she said.
PE firms buy companies and hold them for indefinite periods during which they seek to add value to those assets and sell them on at a profit. ESG integration helps PE firms to understand the sustainability risks and opportunities inherent in their assets and empowers them to make decisions accordingly, said Kuszewski. This boosts assets’ attractiveness, whether they are then sold publicly or to other private investors.
“There is real opportunity to integrate a strong approach to ESG through the PE model and the way that they work and therefore there’s a lot of opportunity to create change in the short term that can lead to demonstrable outcomes,” she said.
Financial Services
UK-based Sancroft has been offering sustainability advice to companies since 1997. Chaired by Lord Deben (John Selwyn Gummer), the UK’s Agriculture Minister under Prime Minister Margaret Thatcher in the 1980s, and Environment Minister under her successor John Major in the 1990s, Sancroft says financial services providers account for half of its client base.
The ESG toolkit identifies four steps PE firms have typically taken as their ESG integration has matured. It begins with the Aware stage, in which managers have a knowledge of the ESG landscape but are finding its expectations, such as the demands for data, a challenge. The highest stage any PE firm has reached so far is that of Optimising, in which managers have put in place a comprehensive integration programme through which the company strikes deals.
“The kinds of questions that we’ve been getting asked is ‘how am I doing?’ and ‘what actions can I take next?’,” said Sancroft senior consultant Siân Wynn-Jones. “We really want to help people take action.”
A further step in the ESG integration maturity curve would be that of Leadership, but Sancroft has yet to identify a company that has progressed that far and reaching it will get harder as time goes by, Wynn-Jones said.
“Nobody in the PE sector is sitting still on this and so the bar is constantly rising,” she said. As such the toolkit will be regularly tweaked to reflect the changing levels of maturity through the industry
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