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How to unleash the potential of ESG data in private markets

2 November 2022

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At the 2022 LuxFLAG Sustainability Investment Week, a panel of ESG and deal advisory specialists discussed how private market funds are challenged by the rising demands of ESG data reporting to their LPs. Is it too much, too fast for market players to cope with?

Over the next decade, 55% of limited partners investing in private market funds will be requesting daily or even live updates on ESG data sets.

That’s according to Antonello Argenziano, product director of Intertrust Group, who opened a panel discussion titled “Unleashing the potential of ESG data in private markets” at the 2022 LuxFLAG Sustainability Investment Week.

The statistics come from an Intertrust Group survey, The future private capital CFO. The statistic proved a good talking point for the panel, chaired by Ahmed Ouamara, LuxFLAG’s head of sustainability operations.

Argenziano was joined by Frédéric Vonner, partner at PwC, and Jane Wilkinson, independent director at corporate governance and sustainability advisory, Ripple Effect.

“This level of reporting was much higher than CFOs of private capital firms were expecting,” said Argenziano, who added that the challenge for many fund managers in meeting LP demands comes down to the availability of data in the first place.

Argenziano said that LPs are demanding more from their general partners in terms of quality, quantity and frequency of ESG data. This is generating higher costs for GPs, which is becoming a concern, as is an industry shortage of talent in ESG data reporting.

Are ESG regulations too much, too soon?

Vonner agreed that he is witnessing the same set of challenges. However, he seems more concerned over the scope of regulations adding to the complexity for his clients.

“There has been a shift in the type of data that is now required, given there is greater intervention from a regulatory standpoint,” he said.

Vonner used the Sustainable Finance Disclosure Regulation and the regulation’s new principal adverse impacts regime (PAI) as a prime example of added complexity and expediency. The double financial and impact materiality reporting requirements are extensive because they must include ESG data and policies at the firm (entity) and product level.

“The type of data, the granularity and the frequency of it are changing and increasing, making it even more complex for those players to tackle the challenges we have already discussed,” said Vonner, adding: “In the private markets you cannot simply buy data from an ESG vendor.”

Ripple Effect’s Wilkinson said that at times fund managers must remind their LPs that every jurisdiction-specific or topical social movement request can’t be met, especially if the data is not material to a fund’s strategy.

Call for ESG vendor data due diligence and private market services

Vonner and Wilkinson voiced their concerns over the validity or manipulation of data provided by some ESG vendors, calling for fund boards to require greater due diligence over provider data.

The panel agreed that the call for more illiquid ESG data services couldn’t come soon enough.

“There is an opportunity for big ESG vendors to enter the private market space to build and use their technology, skills and competencies to act as a brokerage company between certain target assets and the asset manager,” said Vonner.

Private market ESG reporting: too complex or a beautiful opportunity?

Monitoring the differences in asset liquidity, valuation and frequency of reporting can be a complicating factor for GPs. Panel chair, Ouamara posed the topic to Wilkinson by asking if any firms are leading the ESG path that others can follow.

“In general, the large, listed asset managers are buying their ESG data from many different sustainability resources, which can be implemented into an Article 8-type promotional fund that is not thematic,” said Wilkinson. “They can then improve on the data that they buy by adding another layer on top. This is what I am seeing in the UCITs framework.”

Wilkinson sees private equity’s multi-thematic fund strategies leading to a more complex and bespoke approach to data gathering and reporting that doesn’t necessarily lead to an industrialised approach.

Vonner said he finds “beauty” in this complexity. He explained that GPs and LPs alike could, for example, expand their diversity targets, beyond the executive level. Different approaches to defining a factor such as diversity or CO2 levels can change manager to manager or even fund to fund.

“For the time being at least, we don’t have a unified approach, which is also the beauty of it,” said Vonner. “However, this tailored approach can be appealing to investors, but also [may lead to] a rise in complaints if targets are not met or misinterpreted.”

How to turn ESG fears into opportunities

Argenziano said that, despite all the challenges, the private market has an advantage since it’s getting its data direct from the source. “This creates an opportunity for private players to create a mechanism of interaction and discussion that facilitates active engagement, which at the end of the day is the objective of ESG regulation.”

Why Intertrust Group?

  • Expert guidance in how to take control of ESG data in your portfolio with 24/7 access to performance data.
  • Online dashboards and reports allow clients to compare the performance of portfolio companies and funds.
  • Our solutions allow your portfolio companies to calculate greenhouse gas emissions based on up-to-date national and local coefficients.
  • Multi-jurisdictional teams supporting clients across different markets, bringing understanding of local requirements.
  • Our complete global compliance and regulatory services can help you navigate the changing ESG reporting requirements of private and public market investment portfolios.
  • Proven ESG onboarding technology to shoulder what could be a substantial administrative burden on your in-house resources.