How much has changed since we last took dealmakers’ temperature on their ability to analyze portfolio companies’ environmental, social, and governance goals in May? Not much, according to a recent survey. Months after the SEC’s announced shift toward compiling additional data on companies’ ESG metrics, getting hard data on company progress is still a challenge.
Implementing ESG remains a challenge, chiefly due to a lack of standardized reporting and data sets, according to a plurality of 100+ financial services executives surveyed by accounting firm EisnerAmper.
It’s an obstacle some private equity firms are tackling head on. Sean McGrath, a senior associate at Access Holdings and Rising Star of Private Equity award recipient, told Mergers & Acquisitions her firm is spearheading a systematic framework to evaluate ESG progress.
“I’m currently leading the drafting of our comprehensive ESG framework to implement sustainable and socially responsible values and policies not only at Access, but also at all of our portfolio companies,” McGrath said in a video interview with Mergers & Acquisitions for our Rising Stars of Private Equity SPEAK event last week. “Though we’ve always stressed this as the basis of good business practices, the creation of a standardized ESG framework furthers our efforts to make ESG a fully integrated portion of our business model, not just a minor consideration. I believe this is the best path to driving change not only at Access, but in private equity and all of the industries we participate in.”
Across the asset class, ad hoc attempts to organize ESG metrics are still in their infancy. Take social issues like diversity. As an example, 51 percent of respondents to an April survey conducted by the Institutional Limited Partner Association noted they request data on at least gender diversity, while another 40 percent are weighing whether to use diversity as a metric in due diligence. Many companies with environmentally oriented ESG statements might not yet have diversity equity and inclusion commitments. Information on the composition of a portfolio company’s team might be arrayed alongside its environmental impact, or in lieu of it, leaving investors without a comprehensive metric of firm progress.
Other obstacles to widespread ESG-focused investment include dispelling the notion of poor returns (28 percent), sourcing quality investment opportunities (19 percent), and regulation (9 percent), the survey data show.
There is some good news is the survey results: respondents saw private equity as the asset class most ready for ESG investment in the next three years.