Since joining Fitzwilliam Dunne, I have attended a number of webinars and events on ESG data collection in private markets – an area that continues to evolve and improve - and yet the same challenges emerge across asset classes for both GPs and LPs. The questions I have been exploring relate to how companies are overcoming these challenges and whether or not they are ready to prioritize these actionable metrics.
Diverse Standards, but No One-Size-Fits-All
Across the ESG landscape, there are often complaints about the myriad and developing standards for data collection reporting in private markets, and so the EDCI (ESG Data Convergence Initiative) was set up to navigate this fragmented collection of tools and frameworks to create consistent metric definitions for GPs to be able to benchmark their positions, and for the LPs to compare across portfolios.
However, the current EDCI metrics regularly fall short of meeting the requirements of all GPs, who then require further data and metrics to fulfil broader LP due diligence. Additionally, what is material for one company is not necessarily for another, e.g., asking for water consumption from a fintech that has one floor in a small London building.
Quantity issues…
With the need for at least twelve months of data before considering what decisions to make, the lack of ESG data in private markets is a key one to solve. This can stem from the challenges of convincing building managers, or early-stage company leaders, to view ESG beyond mere compliance, and insufficient transparency procedures often resulting in a shortage of resources and structures for gathering and disclosing ESG information across multiple business units.
There are numerous reporting tools that are trying to make it as convenient as possible for data to be collected, but the human touch through collaboration, leadership involvement, and clear communication are equally vital to help managers and private company leaders to understand, and be motivated to address these issues. Certain metrics, like board diversity and hiring statistics, are relatively easier to collect than others, such as data related to renewable energy or achieving net-zero targets.
…and Quality
However, once there is sufficient quantity, the issue of quality then arises. The absence of verification and consistent auditing processes raises worries about the precision, entirety, and uniformity of the data, increasing the risk to GPs of investment decision-making. As one panellist shared “two consultants won’t give the same answer on a building.”
Understandably, ESG maturity varies significantly across regions and companies or asset sizes, underscoring the necessity of robust stakeholder management and relationship building, similar to that of the quantity challenge, to encourage an improvement in the quality of the data. Success lies not in achieving a 100% response rate to a questionnaire, but in deriving value from the collected data and turning it into actionable insights.
"Don’t wait for the perfect data, just get started” was a key takeaway from one of the events. Fitzwilliam Dunne is now supporting alternative investors in transforming ESG strategy and data intelligence, and this month, we are hosting an executive workshop exclusively for GPs and LPs on the topic of ESG Data collection - reach out to me today to find out more.