At present, private markets still have a poor reputation for ESG reporting and benchmarking due to a lack of data and consistency within ESG data. Consequently, private markets have at times been accused of being a place where companies and investors who don’t care about sustainability go to ‘hide’.
In truth, investors want ESG considerations to be front and centre, but traditionally private companies have been less willing to report on their metrics in general. In addition, when companies do report, they use a profusion of data formats, which makes compiling and comparing data difficult. Finally, private markets lack commonly accepted and agreed ESG standards and metrics.
This does not mean private markets are not taking ESG considerations seriously. Rather that the industry needs to take urgent steps to ensure investors can clearly see and compare the ESG ratings of companies on an international scale. In short, there needs to be a simplified way for companies to report this information in order to make ESG measurement and interpretation an easy process.
Technology, specifically open-architecture data-collection platforms such as Hamilton-Lane backed Novata is a key part of the solution.
Online portals, backed by publically available databases, could allow GPs or companies themselves to easily upload data and then extract the information important to them and feed it into a relevant ESG comparison framework. Given the different data types and reporting practices across private markets, platforms need to be agnostic about the type of data they will accept, as this will encourage more private companies to sign up.
In addition, these platforms can host not just different kinds of data but different ESG assessment frameworks. There are several initiatives in the industry to get private market investors and operators to coalesce around a limited set of key standardized and agreed-upon KPIs. This would allow operators to focus on gathering a consistent ESG data set and it would give investors the ability to produce holistic reporting and ultimately benchmarking across their entire private markets holdings. However, a platform can also be neutral between different metrics, as it could just allow investors to select and analyse specific areas of focus that align with their individual investment beliefs.
Platforms of this kind may not necessarily resolve all of the issues related to ESG measurement, as there will always be subjectivity in how to weigh up the competing considerations. The reality is that different ESG considerations are given various levels of priority by different companies or investors, meaning that two private companies could be making a similar level of effort in different fields, yet could have vastly different ratings.
Furthermore, as these types of platforms gain popularity, there is a possibility that multiple platforms could emerge and create scope for very different ratings. This could lead to companies changing platforms to achieve the best rating possible, thus intensifying the problems of ‘greenwashing’ and lack of consistency surrounding ESG data.
Is technology the ‘silver bullet’ answer to ESG issues in the private markets? In some ways, no, because there will always be subjectivity in how to weight various ESG considerations and if multiple platforms emerge there is a risk they won’t complement each other.
However, there is a critical need for better ESG reporting – LPs are asking for it, government regulation is beginning to demand it (such as SFDR) and today we can’t report with such fragmented and sporadic input. That has to change.
Centralised platforms that are data agnostic can give private markets the necessary leg up to prove once and for all that this industry is just as capable of integrating ESG considerations into the investment process as public markets.
The author is Paul Yett, director of ESG and sustainability at Hamilton Lane.