In today’s society, we are increasingly seeing investors move diversity, inclusion and more broadly ESG (environmental, social and governance) to the top of their requirements of their asset managers. Not only do today’s managers have to demonstrate track record and attract investment in a fiercely competitive environment, they have to do so whilst demonstrating commitment to the “right” kinds of investment. To put it bluntly, the market for managers who do not have any specific commitments to these modern principles is shrinking, and shrinking fast. It’s become more than just de rigueur: increasingly, it is being recognised that for sustainable capitalism, we must change the metrics with which investment “success” is measured. Only this month, the President of the European Central Bank (ECB), Christine Lagarde, stated that the asset purchase programme of the ECB will be directed towards “green” bonds – and with €2.8tn to deploy, we are not talking about peanuts here.

So what does this effort entail? Certainly, there will be the following elements:

Target setting and benchmarking

  • Targets need to be measurable and meaningful. Although there is not a universal standard, certain ESG reporting regimes which set out the measurements needed are becoming more commonplace. Initiatives such as the Taskforce on Climate Related Financial Disclosures (TCFD), ILPA’s “ESG Roadmap”, UN Principles for Responsible Investment (PRI), and the Sustainability Accounting Standards Board (SASB) are becoming widely used, as well as peer benchmarking along those regimes.

Data collection

  • Whilst the collection of financial performance data from portfolios is a known quantity, the collection of ESG data is not so much. Managers often struggle to obtain verifiable data from their investees, and even if they can, the aggregation across an entire portfolio, or segment thereof, can be challenging. Technical applications can only go so far in assisting with these and people are still required in order to make sense of the data.

Performance measurement

  • It’s important to gather data to set a baseline, and then be in a position to demonstrate positive change. To do this, the processes implemented to collect the data must be given careful consideration at the start.

Translation into impact

  • Most investors who place ESG at the top of their concerns will want to see how their investment is benefiting society. They want visible and measurable impact. Of course some of this impact may be subjective (think of measuring “happiness”), but there will be real tangible results in certain metrics – for example, the number of girls reaching the end of secondary education in a developing country.

Many firms may be wondering how to get started on incorporating ESG into their operations, but may be daunted by the job at hand. The key idea here is not to do things in a piecemeal fashion. For example, you need to adopt a set of datapoints which can be made common between portfolio companies, and able to be benchmarked against peers. Some figures are relatively easy to obtain (for example, carbon intensity and water use), but others can be more problematic – such as diversity in senior management. If you cannot adopt a common set of datapoints, there is little use in starting the journey. Investors may more confident if a GP has had a professional firm assist in implementing a holistic ESG policy.

Linnovate Partners helps GPs and LPs with all of their analytical and reporting needs. We help firms to collect, aggregate and normalise data, and our teams use the latest custom technology to deliver actionable insights for our clients. Our Portfolio Monitoring Service provides clients with a flexible and tailored service which is intuitive and comprehensive. For FoF / LP clients, our services dive into the underlying portfolios, and help to bring out insights from the data in the companies therein. When ESG is included in the scope, we can help to collate data at source, and give clients a seamless solution where ESG metrics are delivered alongside the traditional financial ones.