Real-time data key to ESG analytics

Access to raw data in real-time is key to unlocking actionable ESG analytics in private organisations and improve risk-adjusted returns, according to market participants

By Aaran Fronda | 17 March 2021

Private organisations do not have the same degree of transparency as their public counterparts, making it more challenging to access environmental, social and governance (ESG) data, says Dan Grandage, head of ESG, private markets & real estate at Aberdeen Standard Investments.

“Equities markets have been engaged with ESG in the form of corporate governance since the ‘90s, with investors increasingly demanding more screening to ensure investments are socially responsible,” says Grandage.

“But that never really translated to private equity in quite the same mainstream way.”

Another major challenge in accessing ESG data in private markets is the number of stakeholders in the chain that firms like Aberdeen Standard Life and other asset managers use.

In the case of a fund of funds (FOF), says Grandage, there are the investors, then the fund manager, followed by the portfolio companies and even they will have several underlying holdings. No one in that chain is responsible for collecting ESG-related data and private companies are not beholden to the same disclosure requirements placed on their public counterparts.

However, due to increased pressure from institutional investors and regulators, along with evidence of a positive correlation between ESG and financial returns, private markets’ disclosure and reporting of ESG data is improving.

From March 10, the EU’s Sustainable Finance Disclosure Regulation (SFDR) requirements came into effect, imposing ESG disclosure and reporting requirements on investment firms and fund managers.

Due to Brexit, the UK government decided not to implement SFDR, opting instead to establish its own green taxonomy and ESG disclosure regime.

“Private companies are not forced to disclose as much data, as they are under less regulatory scrutiny and stakeholder pressure,” says Alexandra Mihailescu Cichon, executive vice president, sales and marketing, at RepRisk, an ESG data science and research company that leverages advanced machine learning in tandem with analysts. “But we are not looking at company disclosures anyway.”

RepRisk looks at what the world says about the company, rather than what the company says about itself, says Cichon.
“Private equity firms are really close with the companies they acquire and they do a lot of due diligence,” she says. “But the information they assess as part of that due diligence is still primarily coming from the company itself.

“We already use technology to assist with climate scenario analysis and modelling to assess the risk it poses to assets in our portfolios,” says Grandage. “None of that modelling and scenario planning would be possible without investment in some pretty sophisticated technology solutions.”

When it comes to ESG, private organisations ultimately want consistent, high quality, reliable data that is actionable and technology will help unlock access to this type of data.

“Private equity and asset owners in private markets are all struggling to make sense of integrating ESG data because it is all so disparate at the moment due to the immaturity of the market – but we will get there in the next few years, with the help of standardisation initiatives and other efforts by regulators,” says Cichon.
 

Become a bobsguide member to access the following

1. Unrestricted access to bobsguide
2. Send a proposal request
3. Insights delivered daily to your inbox
4. Career development