This article is sponsored by BasisPoint+
There is little doubt that a credible environmental, social and corporate governance strategy is fast becoming a ‘must-have’ for fund managers. Andrew Pemberton, chief executive officer of ESG and impact investing software and services provider BasisPoint+, says firms need effective systems for responding to increasing ESG data demands from LPs and regulators. Looking beyond the back office, Pemberton believes that attention to material ESG considerations can help managers push beyond compliance and risk management to drive new value across their investments and broaden their investor base.
What does the growth of the ESG and impact investing market mean for managers and their data needs?
All signs point to ESG and impact investing being a force that is here to stay. A 2022 study from Bain & Company and the Institutional Limited Partners Association found that 70 percent of LPs consider ESG in their asset allocation decisions, and the US Securities and Exchange Commission updated its guidance in September to include ESG investing in its Names Rule. But expectations for how exactly managers should integrate ESG and what they must disclose will continue to evolve.
As a result, more effective ESG data management will be critical within the private funds industry to meet these requirements and to see their benefits. Managers will need a data strategy to help them be proactive in responding to LPs today, while maintaining the flexibility to adapt to a changing regulatory environment. The key for GPs will be to manage both of those dynamics in a way that is relevant to their strategy and effective in creating value within their firm and portfolio.
That means integrating deeper with risk-return analysis to drill down on which ESG levers can help optimize business performance. It also means more thoughtful engagement as part of post-investment value creation plans. This way, managers can prioritize efforts that are most valuable to them and get ahead of the reporting burden to add to their bottom line.
How big a challenge do managers face in making sense of and staying current with regulatory standards and LP requirements?
It is a bigger challenge for some managers than for others. For managers that have already spent years integrating ESG or impact into their strategy, simply making systems updates can improve efficiency and extract more useful insights. For most managers, though, it is a big lift to get a well-informed approach off the ground and it requires ongoing attention toward understanding the space once they are up and running.
There are three main factors that, as I see it, hold managers back from building an effective strategy for ESG integration. The first is at a strategic level. It takes time and effort to understand the landscape of ESG standards and their application to a given firm. Just knowing where to get started can be a big challenge in itself, especially when it is so critical to distill ESG theory down to practical, context-specific frameworks and processes.
The second factor is operational. Most managers lack clarity on where in the organization ESG expertise should sit and what resources will be needed to run a decision-useful process. It is important to understand the desired end goal and then find the right balance between empowering internal teams and engaging external partners.
“ESG integration is itself an investment and managers are eager to see how these efforts translate to profit and cost optimization”
The third blocker is related to return. ESG integration is itself an investment and managers are eager to see how these efforts translate to profit and cost optimization. Once a right-sized ESG strategy is determined, returns follow by applying it in due diligence and portfolio engagement – with a strong data management system – to drive business insights.
What steps can managers take to start putting an ESG strategy in place?
At BasisPoint+, we typically recommend a four-point plan to get started: designate a point person, determine scope of relevant ESG considerations, define the analytical methodology and delegate responsibilities.
Managers need to start with an internal champion to set the agenda and work toward internal alignment, since ESG implementation spans teams and functions. That person can help carry out an initial analysis to determine which ESG factors are most relevant to the sectors in which the GP invests. After that it comes down to refining the methodology and determining where execution responsibility lies across teams. By starting from a clear set of objectives and agreeing on a common language, managers can be sure to comply with relevant standards and avoid any accusations of greenwashing.
What kind of external support do managers typically need?
It depends on the gaps that exist within their firm. There are expert service providers that offer strategic planning guidance; deal team, compliance or investor relations support; or dataset access and collation for more complex analyses.
With regard to technology, there is growing recognition that process automation and business intelligence tools are imperative to make sure relevant data – ESG, financial and contextual – is accurate and useful in practice.
That’s our focus at BasisPoint+. Our offering is purpose-built to meet leading standards for both investment process and reporting best practices. The templates, workflows and dashboards are easy to navigate and customize. Managers can use our platform entirely on their own, or they can rely on our industry experts to guide them through strategy set-up, due diligence, value creation and report generation.
We go a step further, too, with capital advisory services that can help managers use their ESG or impact strategy to engage new LPs and identify aligned investment opportunities across our ecosystem.
It takes sustained effort to build solid ESG credentials – will the returns be worth it?
The short answer is yes; there is a strong body of research validating ESG as a useful investment lens to accelerate revenue growth, increase profit margins and improve fund returns.
By design, ESG integration accrues benefits over the medium- and long-term. In the near-term, managers should look at time saved in research, compliance and reporting functions as a key indicator. They should also consider the benefits of positioning their strategy to maximize their appeal to target LPs and investment prospects: a credible ESG approach can help open doors and demonstrate management alignment in a new way.
It is important to remember that an ESG strategy is not designed or executed in a day. At this stage the goal is progress, not perfection. Managers should feel at ease knowing that there is significant value in getting started and having a baseline from which to learn and iterate – and that our team at BasisPoint+ is here to help along the way.