Now that ESG is a firmly established investment principle, EY’s latest Global Institutional Investor Survey points toward the challenge of aligning ESG policies with data. The main obstacles are familiar: the need for standardized metrics, chief amongst them. But the poll also highlights a shift in attitudes that can ease the path to change.
Investors’ ESG concerns are not just about upside and social responsibility; they’re also about risks. Governance controversies and sexual harassment lawsuits, for instance, pose material liabilities to portfolio companies. A Bank of America Merrill Lynch study puts the liability figure from ESG risks at $500 billion. Yet only 44 percent of survey respondents have updated risk management policies in response to Covid or social justice-related factors.
The gap between risk assessment and action is in partly down to available data and relevant policy. When asked how ESG metrics are being measured across the industry at last month’s EisnerAmper Investment Summit, Institutional Limited Partner Association CEO Steve Nelson said, “The honest answer to that is with difficulty.” He went on to add, “That’s part of the reason you see LPs looking not just for data but to understand the policies they can rely on as regards DEI and ESG, those two things have to continue to come together.”
However, the report does shed light on promising changes in attitudes among industry professionals. As deal multiples surge and portfolio exits abound, nearly three quarters of institutional investors profess an increased willingness to divest companies that aren’t delivering on ESG goals. This also checks out with recent results from a BDO poll of PE investors, which found divestiture expectations rising (at least from corporates).
Check back next month, when Mergers & Acquisitions will recognize firms that are leading the way in our inaugural 2021 PE Innovators in ESG. And join us at our upcoming virtual event: PE Innovators in ESG Speak on Dec. 1!