The challenges and opportunities of implementing ESG in private markets

For private companies, the collection and reporting of ESG data can be highly challenging, particularly given the range of reporting structures and measures. Our panellists discuss how investors can measure the ESG credentials of private companies.

The lack of standardised data in the ESG space is an issue with which many equity and bond investors in public markets will be familiar.

For private issuers, the challenges are similar but often much more acute when collecting and sharing ESG data with potential investors.

Whereas publicly listed issuers have reporting structures in place and third-party data providers to analyse the data, the private market does not enjoy the same kind of coverage, said Charlotte Edwards, who works in ESG credit strategy at Barclays.

“On the private side, many companies just aren’t reporting the data to start with,” she said. “I don’t think we can put any blame on these companies necessarily. Compared with a large publicly listed company, they would typically have a lot smaller staff levels and a lot less resource.”

It’s a situation that is not helped by the lack of standardisation and a regulatory landscape with so many different reporting standards and frameworks, said Edwards.

“We do speak to some companies who are coming at this for the first time, and it’s so daunting. They just don’t know where to start,” she said. “Sometimes you see companies technically reporting the same data, but they might have collected and calculated that data in a slightly different way. You need to be really careful that it's actually comparable.”

As an investor, Kristofer Dreiman, head of responsible investments at Swedish insurer Länsförsäkringar, said his company was not just looking for companies that have signed up to initiatives such as the UN Principles for Responsible Investment, but those that have genuinely embraced ESG.

“There’s a great challenge when it comes to coverage of ESG data,” he explained. “We don’t expect the managers to collect the same type of data for every company, but we expect the manager to collect material ESG data.”

ESG in the private credit space has evolved in recent years, with investors now demanding more information and greater levels of engagement, according to Stefan Behring, head of Nordics distribution at Invesco.

“When we look at the private credit market, only about 10% of the companies that we invest in actually had any outside information related to ESG,” he said. “That information just is not available in the private credit space because it’s not being covered by the large data providers.”

To address this, Invesco developed its own framework “from the ground up” that measured every issuer it invests in from an ESG perspective, said Behring.

“[On] environmental we have four factors, [for] social, we have four factors, [and] governance, we have eight factors that we’re independently rating each issuer on,” he said. “It becomes the analyst’s job to understand the companies and their approach to ESG.

“What we’ve found is that, over time, the issuers are really engaged: they really want to provide this information. They understand the importance of this information.”

Private companies have been overwhelmed by ESG data requests from investors, and a huge number of “slightly different” questionnaires, according to Barclays’ Edwards. This has prompted one industry-wide effort led by the European Leveraged Finance Association to produce a standardised questionnaire for private companies to answer and make the process more straightforward.

Comparability is a challenging issue, said Invesco’s Behring, who highlighted the lack of infrastructure in some private companies to collect data. Instead of concentrating on data collection, Invesco has focused on engagement with issuers on ESG considerations to help them improve their ratings.

“What we found is that our clients are less concerned about this sort of output from a metrics perspective,” he said. “Yes, it’s important to know carbon footprint and stuff, but our clients really want to hear the stories. They want to hear the engagement and how we’ve actually helped these companies evolve on the ESG journey.”

As in public markets, the calls for standardisation of data from investors in private markets are unlikely to go away. But for ESG-minded investors, there are some positive stories around engagement beginning to emerge.

The above article was drawn from ‘The challenges, nuances and opportunities of implementing ESG in private markets’ session at our ESG@Invesco digital client event on 17 June 2021. Please click here to watch the session