How beneficial is it to use ESG benchmarks, scorecards, third-party data sources and a mix of different reports?
For those investing in public companies, the use of ratings and scorecards like MSCI, Sustainalytics and Bloomberg can be helpful for benchmarking. This is especially true for large publicly traded companies because of the abundance of data to back up the rating. But when it comes to private markets, is the data there yet to make these ratings useful? When a private company does not report, the data used in their assessment may have been estimated by the rater or by a third party, which raises questions of accuracy and depth.
Do it yourself?
A client told us recently, “We have created an internal scorecard for our portfolio which we will build into the ESG platform. I think that public or private benchmarks would be helpful to compare sectors and companies but were not a required feature for us since we have other sources we can use like S&P and Bloomberg for example. I think outside ratings are most useful for index funds.”
An objective view can be positive
A ratings company can offer a useful objective assessment, but some GPs need a much more granular assessment that takes into consideration company specific, not just industry specific, nuanced factors like the current regulatory backdrop for example. We see those firms typically creating their own assessment and action plans.
Outsourcing to an ESG consultant
Some GPs hire ESG consultants to conduct ESG-related diligence prior to making an investment. Post-close they may track the ESG topics and metrics identified during the diligence process in addition to their standard ESG surveying efforts. When selecting an ESG consultant, some areas for close inspection would be:
- The consultant’s experience and expertise
- The consultant’s resources and staff
- The quality of the consultant’s ESG reports
- The flexibility of the consultant’s approach
- The value for money offered by the consultant
- The alignment between your priorities and theirs
What can technology providers offer to improve processes and strengthen reporting?
As reporting is becoming more complex and using spreadsheets to manage the data is not sustainable, many GPs are turning to software solutions to automate this process.
Important factors that many GPs are looking for in an ESG data software solution:
- flexibility and customization options
- technical user support
- easy setup of custom questionnaires
- scoring and flagging capabilities
- advanced reporting and analytics functionality
- ease of use for portfolio companies when completing surveys
In our experience, most GPs are looking for the ability to draw from recognized frameworks, but where they are also able to customize based on specific views or add benchmarking capabilities. It’s not enough to just extract or collect data, but data management capabilities are essential too.
Flexibility is key. Technology is a business enabler and should mold to fit your unique internal processes, and flex to meet the needs of investors. Expecting them to adapt processes to meet your systems and platforms will not work.
In part one we bring up the myriad standards and what represents best practice. For more information or advice on selecting software to support ESG data collection, or benchmarking, get in touch with the team at Dasseti.
