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Data Suggests ESG Integration Burden is Easing in Private Markets

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The ESG integration burden on private markets appears to be abating.

Two reports this week suggest that one of the largest investment categories for financial institutions are finding it easier to obtaining the data they need to implement a robust sustainability strategy and that the importance of ESG to portfolio companies is increasing.

A survey of asset managers commissioned by S&P Global Market Intelligence found that ESG disclosures are becoming more standardised within private markets. That makes it easier for asset managers and investors alike to make allocation and risk decisions. The other report, commissioned by Workiva, concluded that many companies that fall outside the scope of a key piece of European regulation nevertheless plan to make disclosures in accordance with its framework.

Data Challenge

Private markets are an important part of the investment jigsaw for institutions, one third of whose capital is exposed to them. They have struggled, however, to assess the sustainability of portfolio companies because of an absence of data. The companies that are typically targeted by private market participants aren’t subject to rigorous reporting regulations. And the ESG data that has been available has tended to be patchy and biased towards the idiosyncratic needs of individual fund managers.

Nevertheless, many are deeply entrenched within global supply chains of listed companies that are required to make such disclosures. Consequently, these companies have been drawn into the regulatory data gathering and exchange operations of many public companies. Recent research indicates that this and other factors are providing asset managers with greater insights into private market sustainability.

“Practitioners are preparing for a market where assured integrated reporting is the de facto global norm,” Paul Dickinson, a member of Workiva’s ESG Advisory Council, wrote in the data company’s report.

Workiva’s research established that four fifths of companies surveyed for its “2024 ESG Practitioner Survey” that are not within scope of the EU’s Corporate Sustainability Reporting Directive (CSRD) intended to comply with it anyway. Stating that “integrated reporting is the new gold standard” the report also found that companies within and outside of the EU planned to abide by CSRD guidelines.

The report suggested that the reason for this was because companies realised that integrated reporting unlocks value. A similar proportion told surveyors that integrated financial and ESG data enables better decision-making “that can improve a company’s financial performance”.

Almost nine out of 10 said it would improve their long-term value creation capabilities. Encouragingly, almost all companies surveyed said they had confidence that their ESG data is accurate.

The growing importance of ESG to private markets and the financial institutions that invest in them has been highlighted by the emergence of products and services designed to help asset managers and portfolio companies. Among them, private market investor services company Apex Group acquired MJ Hudson’s ESG software and advisory team last year and sustainability consultancy Sancroft launched a free Investor ESG Toolkit for private equity firms.

S&P Global Market Intelligence has also brought together a slew of data management tools and expertise to target private market and ESG in investors.

Competitive Advantage

Companies’ positive view of the benefits of ESG reporting was also reflected in the S&P research, which focused on private market practitioners.

“Shaping Private Markets in 2024: Returns, Risk and Regulation” found that asset managers were drawn to companies that focused on ESG factors because they tended to have better access to finance and stronger risk-mitigation strategies.

“Key stakeholders, from investors to regulators, are demanding ever more transparency in this area,” the report stated. “However, many alternative asset managers also view ESG as an opportunity, providing the means with which to generate new value and secure greater competitive advantage.”

The study of 60 senior executives from alternative asset managers found that 91 per cent expect ESG issues to become more relevant over the coming year. Two fifths believe the importance of ESG will increase significantly.

Importantly, the report said that almost nine in 10 reported that ESG disclosures within private markets were becoming more standardised. Having a more homogenous reporting framework makes it easier for investors and asset managers to compare sustainability performances between companies.

“Disparate reporting methods have become a burden for everyone,” the report cited the CFO of an infrastructure asset manager in Australia as saying.

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