The Responsible Investment Forum: New York is in full swing. Yesterday, delegates heard from a host of influential investors including CalPERS, Harvard Management Company and New York State Common Retirement Fund, as well many big name managers.
The event is conducted under Chatham House rules, so outside of the room, speakers are not identified in connection with their comments. We’ll bring you some full insights soon, but in the meantime, here are some of the themes emerging from the stage.
Consistency of ESG data has always been a bugbear for sustainability-minded investors. Guess what? It still is. One prominent LP likened unstandardised ESG reporting to valuing companies using differing financial metrics. If private companies could choose whether to report EBITDA, adjusted net income, free cashflow or operating income, “how difficult would it be to assess the relative attractiveness and performance of an individual company”.
The investor in question is pushing for comparable ESG metrics from its external private equity managers. “Having much better visibility across what type of risks GPs are taking to generate returns is such a fascinating thing we’re hoping to track,” the LP said.
- Further reading: Private fund consortia take aim at the data gap
How you measure impact (and therefore benchmark it) is another recurring hot-button topic: one prominent manager said that impact investors should not spend too much time agonising over it – just get on and invest in impactful businesses.
“We need to be confident as investors that we’re not over-emphasising the need for metrics and letting that paralyse us from directing capital where it needs to go,” said the GP.
For one thing, obsessing about the data could skew impact investors towards more mature businesses – with more readily measurable outputs – and away from early stage companies, which could have outsized impact. Instead, this GP is “identifying the companies where the impact is integral to the business model. Those are the products and services for which, as the company grows and thrives, so too does the impact”.
Not everyone agreed. A competing GP said: “We’re fiduciaries. We have to see [a potential portfolio company’s] ability to provide data and information on both the growth of the business and identifiable impact.”
Investors want credits
“We now have institutional LPs asking us very directly, ‘How do we get credit for the carbon credits that [your firm] generates’,” a GP in the natural capital space told delegates. “They’re not asking about returns. They know they’re getting a high return from us. This is [about] an additional form of return on their investment. Investors are now starting to be very sensitive about the collateral benefits of [their] investment.”
Race for talent
Private equity investors, and by extension, their portfolio businesses, are feeling the effects of an exodus from corporate America referred to by some as ‘the great resignation’. “Covid was a dramatic wake-up call,” said one panellist at the forum. The key issue, they said, is that employees no longer feel an alignment of purpose, both for themselves within the company, and for the company in the wider world. The task then, for PE firms hoping to compete in the global race for talent, will be creating that purpose. “Whoever secures the top decile [of employees],” the panellist said, “will win the next decade and probably the next century”.
Jordan Stutts, Snehal Shah and Michael Baruch contributed to this report.