ESG
FINDINGS & INSIGHTS:
UNCOVERING THE ESSENTIALS IN ESG DATA
6 minute read time
KEY FINDINGS
20% of all surveyed firms outsource their ESG data collection and reporting to a third party
40% of all surveyed firms use a combination of internal and outsourced resources for their ESG data collection and reporting
68% of all surveyed firms are either very confident or fairly confident about their organisation’s ability to meet ESG data collection and reporting requirements
ESG
FINDINGS & INSIGHTS:
UNCOVERING THE ESSENTIALS IN ESG DATA
6 minute read time
KEY FINDINGS
20% of all surveyed firms outsource their ESG data collection and reporting to a third party
40% of all surveyed firms use a combination of internal and outsourced resources for their ESG data collection and reporting
68% of all surveyed firms are either very confident or fairly confident about their organisation’s ability to meet ESG data collection and reporting requirements
Many firms are still working their way through the weeds when gathering ESG data on deal targets or improving ESG reporting in their portfolio, but it will be worth the effort.
When it comes to who is responsible for ESG data collection and reporting, 59% of those from relatively smaller average fund sizes say their ESG data is managed in-house, without any third-party support. By contrast, respondents representing larger fund sizes in our survey more commonly lean on both internal management and third-party support (56%).
This is somewhat surprising—you might expect larger funds to have their own in-house team and therefore rely less on external providers. But external validation is becoming increasingly important when it comes to ESG reporting, in terms of credibility and to avoid any claims of “greenwashing”. Having a combination of internal and external teams looking after ESG data collection and reporting is helpful when validating any ESG-related claims and in dealing with regulatory compliance.
Interestingly, firms with an average target fund size of €250 million-€500 million are the most likely to have all their ESG data collection and reporting outsourced entirely to a third party, with close to a quarter (24%) of these firms citing this.
External validation is becoming increasingly important when it comes to ESG reporting
Survey respondents were asked: who undertakes your ESG data collection and reporting?
SOURCE: Aztec Group & Acuris Report – Differentiation Through Data (Nov. 2022)
of all firms manage internally
of all firms outsource to a third party
of all firms use a combination of both
“The challenge with ESG is differentiating the good data from the bad because there isn’t an agreed standard against which we can benchmark the results. If you don’t ask tough questions, you won’t know whether you have something worthwhile or not.”
Ahmed Khamassi – Chief Digitalisation officer, Stirling Square Capital Partners
Firms lack confidence in their ESG reporting
Turning to the question of how confident firms feel about their ability to meet ESG data collection and reporting requirements, only a minority say that they are very confident. Firms representing larger average target fund sizes (€1 billion or more) fare better than smaller ones (less than €250 million): 39% of larger fund size managers say they are very confident, versus just 20% of those at the smaller end of the spectrum.
“ESG is one of our transformational levers and we monitor it closely in our portfolio companies,” says Ahmed Khamassi, chief digitalisation officer at Stirling Square Capital Partners. “The challenge with ESG is differentiating the good data from the bad because there isn’t an agreed standard against which we can benchmark the results. If you don’t ask tough questions, you won’t know whether you have something worthwhile or not.”
How confident are fund managers in their organisation’s ability to meet ESG data collection and reporting requirements?
SOURCE: Aztec Group & Acuris Report – Differentiation Through Data (Nov. 2022)
VERY CONFIDENT
FAIRLY CONFIDENT
SOMEWHAT CONFIDENT
SLIGHTLY CONFIDENT
NOT CONFIDENT AT ALL
ESG data offers obstacles and opportunities
Looking at the factors that drive respondents to collect, evaluate and report ESG data across their own portfolios and projects, 60% single out the need to comply with regulations. This is not surprising given the huge rise in non-financial reporting requirements over recent years. Regulation may have been brought in to appease investors, but it now seems to set the tone for how managers are approaching ESG.
The challenge is that reporting requirements are not consistent and have yet to stabilise. The situation is further complicated by the rapid rise of voluntary ESG reporting frameworks.
Although the need to satisfy investor questions/expectations is generally not seen as a top driver for ESG reporting, this subject nevertheless prompts a great deal of commentary from respondents managing funds of all sizes. Respondents also report that the scope of investor requests for information is growing wider all the time.
“Investors are demanding updated information, which we provide, but they want the information to be highly comprehensive and their main demand is ESG data,” says the partner of an infrastructure fund based in Sweden with an average target fund size between €250 million and €500 million.
The managing director of a German private debt firm with an average target fund size of €500 million-€1 billion adds: “Investors learn about the different ESG metrics and request information about each of these metrics separately. Given the lack of ESG data, we find it difficult to meet their requests.”
“Investors are demanding updated information, which we provide, but they want the information to be highly comprehensive and their main demand is ESG data”
Partner of an infrastructure fund based in Sweden with an average target fund size between €250 million and €500 million
Consistency is key for ESG data
Focusing on the specific challenges that respondents face with ESG data collection and reporting within their own portfolios and projects, 42% say that a lack of uniformity in the current reporting framework is the greatest challenge. This is the most common concern and is considered to be the number-one challenge by 30% of respondents.
Poor-quality data (39%), lack of technology to monitor ESG performance (37%) and regional differences in ESG approaches (35%) are also widely cited as ESG data challenges when collecting and reporting on assets in which respondents already have an interest.
While the challenges of acquiring ESG data about portfolio companies are significant, they are by no means insurmountable.
“There is some standardisation of ESG data, but not enough. As a consequence, we still have to do our own thing,” explains Caroline Löfgren, chief sustainability officer at private equity firm Hg.
“This starts when we onboard portfolio companies and it continues annually throughout the holding period. This is mandatory. We ask about 170 questions across three areas—essentials, employees and society. Essentials covers governance, data privacy and cybersecurity. Employees includes diversity and inclusion, employee engagement, culture, mission, vision and talent management. Society encompasses environmental impact, customer relations, transparency, and community engagement. We have a scoring methodology and we provide feedback through a board report. It’s about asking the right questions, using the right tools, and having the right commitments from the portfolio company.”
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