Review of the Year: Development of the data discussion

ESG professionals have a love-hate relationship with discussions about data.

The hate part comes from its repetitious nature: it has been a standing item on every sustainable investment conference agenda since the dawn of such events. A question from the floor at November’s Private Equity International Responsible Investment Forum: Europe was ‘Are we really still talking about this?’

The love part comes from the idea that high quality ESG data, disclosed to investors in a standardised way, would be truly transformational, allowing GPs and LPs to make informed investment decisions and allocations, and to demonstrate the relationship between sustainability and financial performance.

In 2023, there were significant developments on the “data love” side of things.

Most prominent was the first meaningful benchmark data to appear from the ESG Data Convergence Initiative (EDCI). The Boston Consulting Group, appointed by the EDCI to collate and analyse the data submitted by its members and produce its benchmarks, released a report assessing the 62,000 data points submitted by fund managers this year.

“The significance of this report should not be underestimated: it provides some of the earliest quantitative, statistical evidence we have of how effective ESG initiatives are, how they correlate with material value and how they compare with other markets, specifically within private equity portfolios,” we wrote at the time of its release in October.

The data showed that private equity-backed companies outperform similarly-sized listed companies on several social KPIs. It also illustrated a link between social sustainability metrics, like workplace injury data and employee engagement, and financial performance.

There were also significant developments in the private credit market. The ESG Integrated Disclosure Project (IDP), which seeks to harmonise ESG data collection and disclosure by borrowers, won the support of several global credit ratings agencies, adding to its forward momentum.

Despite the ennui implied by the question from the floor at the Responsible Investment Forum, the overall sense was that LPs were revelling in their newfound ability to source ESG data from managers, and managers are excited to start thinking more about ESG as a value creation lever, rather than a reporting exercise.

But before we get too ‘loved up’, we should note that there is still a wide divergence in viewpoints as to the merits of standardised ESG data, with some arguing that the more one tilts towards standardised metrics, the more one tilts away from materiality. This was on clear display earlier in the year at the Responsible Investment Forum in New York.

Love them or loathe them, these discussions will continue.