ESG
FINDINGS & INSIGHTS:
IS ESG DATA BECOMING A DEALMAKING DEAL BREAKER?
5 minute read time
KEY FINDINGS
65% of firms with an average target fund size over €1 billion see a lack of ESG data as a major deterrent
69% of firms with an average target fund size under €250 million say they take ESG data seriously, but its availability is not a make-or-break condition
ESG
FINDINGS & INSIGHTS:
IS ESG BECOMING A DEALMAKING DEAL BREAKER?
5 minute read time
KEY FINDINGS
65% of firms with an average target fund size over €1 billion see a lack of ESG data as a major deterrent
69% of firms with an average target fund size under €250 million say they take ESG data seriously, but its availability is not a make-or-break condition
Private markets take ESG seriously but must overcome difficult issues with the data surrounding this vital issue.
“ESG is a core element of our investment strategy, and our approach is data driven,” says Linus Lund, director – fund controller of Nordic Capital Advisors. “With better data, we empower our portfolio companies to enhance their sustainability performance. Since 2014, they have been required to perform an annual sustainability data review and we use a specialist software platform to systemise the reporting processes. This allows both Nordic Capital and portfolio companies to collect, aggregate and analyse data in different areas of sustainability and, in total, we analyse around 50 different data points.
“The data is used in different ways, including monitoring performance and progress, linking to Global Reporting Initiative Standards and the UN’s Sustainable Development Goals, as well as meeting the increasing regulatory requirements on non-financial reporting.
“To spearhead transparency and streamline ESG data in the private equity industry, Nordic Capital is proud to be part of the sector’s first-ever global ESG data convergence project, the ESG Data Convergence Initiative, endorsed by the Institutional Limited Partners Association.”
"ESG is a core element of our investment strategy, and our approach is data driven... With better data, we empower our portfolio companies to enhance their sustainability performance."
Linus Lund – Director-Fund Controller, Nordic Capital Advisors
Is bigger better for ESG deals?
The extent to which ESG impacts on dealmaking is directly proportional to the target fund size. To put this in context, firms targeting the largest funds (those of €1 billion and above) are two-and-a-half times more likely to cite a lack of ESG data as a major dealmaking deterrent than the smallest funds (those with an average target fund size of less than €250 million).
Delving into the detail, 69% of firms with a fund size of less than €250 million say that they take ESG data seriously, but its availability is not make-or-break for them. By contrast, 65% of firms with an average fund size of more than €1 billion cite a lack of ESG data as a major deterrent.
Very few firms say that they do not normally take ESG data into account and none of the largest firms say they normally overlook ESG. However, 7% of respondents of firms with an average target fund size of less than €250 million say the opposite—they do not normally take ESG into account. This is likely to reflect the fact that firms working in this part of the market are often investing in startups and other early-stage businesses for which little or no reliable ESG data is available.
The extent to which ESG impacts on deal-making is directly proportional to the target fund size.
Survey respondents were asked: to what extent does ESG data availability affect your investment decisions?
Lack of ESG data is a major deterrent
Average target fund size €1bn +
Average target fund size €500m – €1bn
Average target fund size €250m – €500m
Average target fund size <€250m
We take ESG data seriously, but its availability is not a make-or-break condition
Average target fund size €1bn +
Average target fund size €500m – €1bn
Average target fund size €250m – €500m
Average target fund size <€250m
SOURCE: Aztec Group & Acuris Report – Differentiation Through Data (Nov. 2022)
"ESG reporting has become stricter and more transparent in some regions. In some emerging markets, the rules are not as strict. With these different standards and frameworks, ESG data collection is impacted because we do not know if the data is incomplete"
Managing Director of a multi-asset fund based in the US, with an average target fund size exceeding €1 billion
Connecting the ESG data dots
Assessing the link between ESG and financial performance is of significant concern for 79% of respondents, with 26% selecting it as the number-one concern. Clearly, this is a vital ingredient when evaluating deal targets.
However—as with internal and portfolio company ESG data, discussed above—it is the lack of a standardised reporting framework for target company data that stands out as the number-one challenge for almost a third of respondents.
“ESG reporting has become stricter and more transparent in some regions. In some emerging markets, the rules are not as strict. With these different standards and frameworks, ESG data collection is impacted because we do not know if the data is incomplete,” says the managing director of a multi-asset fund based in the US, with an average target fund size exceeding €1 billion.
In a similar vein, respondents point to both a lack of consistent metrics and a lack of standard ESG data points as being blockers when weighing-up targets.
As the CFO of a multi-asset firm based in the US with an average target fund size between €250 million and €500 million explains, different reporting structures mean the firm cannot gauge accurately the capabilities of a target company.
“We may have different standards from these companies, and we cannot make extensive comparisons,” he says.
While there is no silver bullet solution as far as managing ESG requirements is concerned, some respondents point to the increased use of technology—and the implementation of a data strategy—as having the potential to ease the burden.
As the partner of a US-based multi-asset firm with an average target fund size above €1 billion puts it: “A data strategy prepares the team for analysing information across different categories. ESG reporting is a big part of our responsibility today and we can focus on this factor precisely.”
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