Increasing ESG data collection requirements are causing a divide among GPs between those that are willing to bear the additional cost, and those looking to pass it on to their LP base.
Speaking at last month’s Infrastructure Investor Global Summit in Berlin, Ben Alves Walters, senior investment director at Cambridge Associates said: “with respect to the quality of data, there is definitely an elephant in the room, which is: the more quality it is, the more costly it is to extract.”
Regulatory requirements and LP demands have led to a rapid increase in the quantity and sophistication of data that GPs are required to gather. As a result, the market for ESG data services is growing at a rapid pace. A report earlier this year from French management consultancy Opimas found that spending on ESG products for private markets, though still a small fraction of the overall ESG data market, is growing at a compound annual rate of 45 percent. Sales of private markets ESG data services are predicted to reach $120 million by 2025.
“Where is that cost born?” Walters asked. “Is that in-house as a GP, because these are our fundamental principles. Or do we feel forced to actually pass these costs on to the underlying investors.
“At which point you get a bifurcation between those LPs who say: that’s absolutely fine, this is completely what we’re looking for. And you have other LPs that say: right now, it’s not meaningful for us. This is an additional cost, an additional fee drag that frankly we didn’t ask for and if we are going to evaluate you critically on performance alone that’s going to impact negatively.”
There is data to support the claim that costs are a material issue for GPs. A recent survey by law firm Dechert found that cost considerations were the most commonly-cited barrier to ESG adoption among EMEA and APAC-based GPs.
Furthermore, portfolio companies have found themselves dragged into the costs debate. The same report found that “many portfolio companies are reluctant to embrace ESG initiatives, because they see them as a costly compliance exercise with little direct or immediate financial benefit”.
The question of who pays for data collection adds another element to an ongoing tussle between GPs and their investors on ESG data. Earlier this year, panellists at New York Responsible Investment Forum described how they were denying data requests from LPs on grounds of immateriality. Regulatory developments and industry-led voluntary initiatives have gone some way to resolve the issue of what data gets collected – regardless of materiality. Who bears the cost, however, is an issue that is unresolved.
Even if GPs do shoulder the burden, there is a danger that it could come at the expense of expenditure in other areas. In response to Walters’ comments, fellow panellist François Bergère, executive director at Long-term Infrastructure Investors Association, speculated that going “deeper and further” into incorporating data collection measures “could lead to neglecting some more directly operational” aspects of portfolio management.