This article is sponsored by Sanne.
What role do you think digital transformation has played in ESG?
David Fowler: The impact has really been twofold. First, digital transformation is enabling businesses to report ESG key performance indicators in real time, thereby aiding the data capture and then the reporting, dashboards and visualizations that are possible for both investors and GPs. Digitization is enabling that to align with regulatory reporting standards and bringing that information to life for investors.
Digital transformation is also aiding companies to improve their ESG processes. As an example, investment teams are able to do so much more by video conference, and reduce the need for investors to travel to target companies to conduct due diligence.
For private equity, the way in which we capture that data, clean it up and then distribute it in a meaningful way to investors is critical. But technology is also enabling investors to carry out their own activities with much greater regard for the environment.
Karlien De Bruin: Not so long ago, businesses kept records like legal agreements, regulatory applications, investor AML documents and financial statements on paper. Over time, these were digitized, which not only reduced the cost and environmental impact of printing but also reduced the need for physical storage. The pandemic allowed the industry to review legacy archaic processes and look for solutions, such as electronic signatory software.
Migrating data centers to the cloud has allowed employees to work from home, reducing their carbon footprint, and reduced the carbon footprints of corporates by transferring their Scope 2 emissions to Scope 3 emissions and the cloud provider.
Finally, technology makes us more efficient, improving the social impact on employees and customers and enhancing the governance impact by improving risk management and compliance.
What is your perspective on the current focus on ESG?
DF: ESG has been talked about for a number of years but the pandemic has accelerated and sharpened everyone’s focus. There is now real action taking place; every manager has this at the top of their agenda. Institutional investors now all have their own ESG KPIs that they need to track and policies that they need to comply with, so they are pushing managers to focus on the reporting they require.
That, in turn, means managers are asking for more automation of that data collection and reporting process, so they have access to platforms that allow them to manipulate and consume that data.
KDB: Standardization is going to make everyone’s lives easier. IFRS is working with the Sustainability Accounting Standards Board and soon it will be standard to disclose both financial and non-financial information.
A lot of the ESG data required for reporting is not yet routinely gathered by smaller companies, which will have to put processes in place. Most of the data is currently in finance or facilities databases, so it is available but not in the format that will make reporting possible without human intervention. Ultimately, reporting on and improving sustainability metrics will benefit businesses, so it is in their best interest to gather data and start reporting.
David, you were previously based in Asia-Pacific, before moving to London last year. What differences have you observed in regional approaches to ESG?
DF: Traditionally, Asia was a bit slower to the game than other parts of the world on ESG, and the global movement was really being led by Europe, particularly with the advent of the Sustainable Finance Disclosure Regulation. Now it is really starting to catch up, with the Monetary Authority of Singapore issuing guidelines as the end of 2020 on Environmental Risk Management.
In the US, progress is slightly behind Europe. But we are witnessing a growing commitment to the automation and capture of data, driven by investors. LPs are increasingly doing due diligence on GPs and expecting them to have policies that are ESG-compliant at fund level. It is no longer sufficient to just have a fund making ESG-compliant investments; you need to be walking the walk as a manager.
What do you see managers prioritizing when it comes to ESG and responsible investing?
DF: The priority is still at the investment level. We have always had impact managers and ESG-focused funds, and those are on the increase, but we are seeing more traditional, non-impact managers having a deep ESG focus. The majority of managers, when making investment committee recommendations, now include a focus or section in their IC paper on ESG. Even if it’s not a prerequisite for making an investment, it is a consideration in every decision.
Additionally, managers are thinking from a commercial perspective and considering the impact this might have on their future fundraising abilities. If they can be classified as Article 8 or Article 9 funds under SFDR, and demonstrate they are integrating sustainability into their investment processes, that will have commercial benefits.
Finally, the focus of managers has traditionally been on the environmental side, and then governance, but increasingly the social side is getting more attention. LPs are pushing for more diversity and looking at the gender divide in teams and on the boards of portfolio companies. In certain sectors that is more of an issue than in others, and often the social metrics are more nuanced – you may be employing more men than women, but you might be employing men from poorer socio-economic backgrounds, for example. That is harder to articulate to investors.
What are the biggest challenges for managers and investors in addressing these topics?
DF: It comes back to capturing data. Financial data is easy to capture, but a lot of ESG data is subjective and has not previously been monitored, so obtaining that information is challenging.
The second issue for LPs is there is limited standardization in terms of reporting at this stage. Certain LPs have their own requirements and formats, so that puts pressure on GPs to manage all those requests from investors in order to deliver data in a way they can easily digest. That can be time consuming and is an area where using a third-party administrator with a platform capable of providing that can be extremely valuable.
How is Sanne supporting clients with ESG data collection, measurement and reporting?
DF: Sanne offers access to ESG advisory experts with strong experience in ESG strategy development, reporting frameworks and even advice on how to move to net zero.
We can provide our clients and their investors with expert data analysis, governance and training to help with the understanding of ESG and the regulatory requirements. Not only are we helping managers with their external compliance, we are also helping them develop their own internal policies and procedures and link those to financial reporting.
David Fowler is global head of private equity and Karlien De Bruin is global head of ESG at Sanne