Months after the SEC’s announced shift toward compiling additional data on companies’ Environmental, Social and Governance metrics, getting hard data on company progress is still a challenge, said panelists at Mergers & Acquisitions’ The Best in M&A Speak virtual event yesterday. The event honored the winners of the 2021 Top 10 Middle-Market Deals of the Year.
A key challenge is standardizing metrics across companies. A Limited Partner with positions across numerous funds could be inundated with ESG reports citing disparate measures, said Women’s Association of Venture and Equity board member and Fordham University private equity professor Sheryl Schwartz. “One of the challenges as an LP is you’re getting all different formats and all different information,” Schwartz said. “To get 120 quarterly reports and then each fund has 20 to 40 companies, there has to be a way of aggregating that data and coming up with conclusions. And that process has not yet been fully developed.”
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 Institutional Limited Partner Association survey 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.
Moreover, company commitments vary by industry and the passion of its investors. An LP with a desire to make an impact in diversity could push for metrics and solutions in portfolio companies for that dimension, while other themes get less priority. Likewise, a company working in oil and gas might have an opportunity to make a stronger impact within its core business on the environmental front than on others.
“If there are ways we can come to a consensus on metrics, I think we can be much more effective about where to have an impact and push for change,” said Paul Kang, president of Ita Companies and another panelist at the virtual event.
Salil Patel, managing partner at Virtuosity LLC, said that grounding a portfolio company’s ESG mission into the investment process could simplify data collection. A recent case proves the point. Virtuosity helped a company that facilitates ALS patients’ interaction with computers. Because the company’s mission is inextricably linked with a social goal to facilitate greater inclusion of end-of-life patients into day-to-day activities, a concrete measurable for the company could be as simple as revenue growth.
Governance is also a place where investors can notch relatively easy wins, Schwartz notes. Private equity owners commonly have board seats at portfolio companies and can advocate for priorities at that level.
But most companies’ missions aren’t as clearly ESG-driven. Investors looking to hold corporations accountable for climate impacts, workplace diversity, and political spending disclosures might well have to await potential SEC reforms.
To watch the full discussion, see the video.