Private Equity and ESG: how digital platform solutions support LPs along their ESG journey

Introduction 1

ESG (Environmental, Social and Governance) topics have become of increasing interest to private capital players in recent years. This is due to several developments:

  • Global initiatives like the Paris agreement and the European Green Deal lead to
  • increased awareness of climate change and what impact investments have
  • Establishment of UN Sustainable Development Goals (SDGs),
  • and regulatory development putting pressure on both General Partners (GPs – fund managers) and Limited Partners (LPs – investors) to monitor and report on their investments regarding ESG.

The dynamic landscape of ESG includes many facets and focus areas. In the following, we concentrate on the practical underlying aspects of data collection, data utilization and its communication through visualizations. We show how all those aspects can be addressed through a digital platform-based solution, enabling value creation.

Challenges in ESG adoption for private markets 2

Implementing ESG into private capital activities calls for processes and linked data. As relevant fund-specific and GP-specific ESG data is not as easily available as traditional financial data, GPs and LPs face various challenges:

  1. Data structuring
  2. Data capture and transfer
  3. Data handling
  4. Visualization and communication

Ideally, those four challenges are met with minimal effort for both sides (GPs and LPs). At AssetMetrix, we have set the following best-practice approach:

Data structuring challenge

Having looked at both industry best practices and worked closely with our clients, we initially define ESG variables (for the fund manager level). We suggest starting with established and already used instruments like PRI information (Principles for Responsible Investment), including signatory status and date.

In a stepwise and client-centric approach other variables are determined. Those can vary in their manifestation: binary responses (Yes/No), multi select and free text answers can be outlined.

On fund level, data such as investment preferences (e.g., SDGs) and their application in the investment guidelines can be collected. This follows a bottom-up approach.

Table 1: Starting point data structuring and variable selection for “manager section” data

Data capture and transfer challenge

Once all variables are selected, it is possible to then process them via a portal-based data exchange solution. Data validation is addressed, and data entry hurdles are lowered. After being defined and aligned with the LP (data initiator), the data is then collected over a cloud-based platform from the GP (data originator). Hence, AssetMetrix’s specific platform solution enables an easy exchange for all stakeholders.

Data handling challenge

As a next step, the data is funnelled into the client’s data base. During this step, we ensure that:

  • a data-driven single source of truth is established,
  • seamless connection to other existing client data (financial and investment data) is guaranteed,
  • the connection to relevant frameworks – that will support mapping purposes (e.g., country and industry specific) – is given.

Visualization and communication challenge

Consequently, outcomes such as interactive visualizations and an integrated reporting are enabled. The following figure summarizes the four challenges and how they are addressed:

Figure 1: Four challenges with ESG data and how the AssetMetrix LP ESG solution can address them efficiently

Your benefits: a stable, scalable platform solution enabling decision making and continuous agility 3

Addressing ESG data challenges via a consolidated platform solution offers stability and scalability, considering that other functions such as (financial) reporting and analytics can be enriched with the outlined ESG content. Furthermore, such a solution allows the client to flexibly decide on specific permission and section user rights: the collected information can be shared with others in an efficient and secure manner. Moreover, data can be extracted for further individual analysis.

The value generated for LPs can be summarized as follows:

Integrated Reporting

Integrated Reporting is fostered by the possibility to combine data from different sources (and prevailing frameworks) and directly funnel the collected ESG data into one report. In the case of AssetMetrix’ LP ESG solution, these collected data points can directly go into defined quarterly reports which investors can view, analyze and further distribute to their stakeholders.

Enabling informed decision making

Decision making is supported via a data driven approach. Interactive visualizations allow the combination of existing portfolio data with the collected ESG data points. This can be illustrated by the following examples.

Kick-start discussion and analysis with an entry point aggregation metric

Bearing in mind the nature of subjective scores (selection of variables, availability, weighting), the above mentioned collected ESG data can be rudimentarily summarized into a manager score. This score can be used for initial discussions and act as a starting point for further analysis between informed parties. Besides the collected “manager section” data (focus of this article – cf. table 1 for data details), portfolio country and industry scores can support the overall assessment. Those two scores follow a bottom-up approach and build up on portfolio company level data.

Data drill down to most granular level

Coming back to the collected data points, the following figure 2 provides practical insight on the outcome to enable informed decision making.

On fund manager level, the above pie chart summarizes the provided data with the previously mentioned score.

Next to the chart, the current data coverage / response rate is shown. This touches upon one challenge, which practical implementation faces: despite current regulatory momentum, a large part of disclosure of ESG data still happens on a voluntary basis between GPs and LPs.

However, our existing solution indicates that the data coverage rate is increasing, during the data provision phase, and final data coverage rates of >60% indicate that GPs meet this effort with approval and active participation.

Figure 2: Portal visualization and accessibility of collected fund manager data

The table, in the lower part of figure 2, lists all the collected data – also directly downloadable via Excel.

Performance/risk visualization

Building up on portfolio company level data, Fair Market Values (FMVs), industry classification and country information, a total portfolio score is derived. The total portfolio score consists of a) the country score (based on the SDGs) and b) the industry score (based on SASB material issues – The Sustainability Accounting Standards Board). The country score reflects the country-specific score given by the SDGs: a higher score indicates higher progress addressing the (broad spectrum of SDGs). The industry score follows the same logic: higher SASB scores indicate a lower amount of material financial risks within the specific industry.

Figure 3: Performance/ESG risk matrix (of e.g., top 5 funds by FMV) [Dummy funds]

The x-axis displays a performance indicator: here TVPI. In addition, the described total portfolio score is shown on the y-axis.

Connectivity and interlinkage between data and portal solutions: LPs and GPs

In the future, mutual agreement on data integration is to be expected – especially due to increasing importance of regulation as well as growing quality and quantity of data. This will boost the opportunities the platform solution provides by interlinking portals at reduced efforts for GPs and LPs.

Data already collected, curated, and made accessible will then be re-useable. Furthermore, the whole value chain along the data is streamlined. From data collection to the final communication to the investor, the portal solution – and even technically possible connection between portals – can provide real-time information.

Preparation for progressing regulatory landscape and data evolution

Existing and upcoming refinement on details and processes to make data externally available are met with AssetMetrix’s platform-based solution. The platform can be connected to existing data solutions, and it provides the technical foundation to handle ESG data. The evolution of ESG data in scope, quality and quantity demands such a stable and expandable occupation. AssetMetrix’s solution enables you to become proactive and address those issues in an efficient way.

Learn more about our ESG solutions and find a solution for your ESG challenges!

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Dr. Philipp Abel
Product Development

Christian Tausch

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