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Why are private asset investors focussing on ESG in 2021?


Reports in the financial news show a large increase in retail investors all across the world so far in 2020. While these investors may not be focusing as much on ESG in 2021, there is a whole other investor landscape that will be. The private asset investor and their related portfolio companies will continue to need more and more information about non-financial disclosure and ESG reporting. .

According to the 2020 Preqin Global Private Equity & Venture Capital Report from February, the private equity and venture capital industry has had over $4tn of assets under management.

Earlier in November, renowned Pension Fund, Scottish Widows joined a host of other Pension Funds excluding investments who did not pass the relevant ESG tests.

If these investments are in publicly listed companies, then no problem. But what if they are part of a growing private equity portfolio where non-financial disclosure is still not as popular as it is with those listed on various exchanges around the world?

Last week, #DisruptionBanking shared a Press Release by the International Organization of Securities Commissions (IOSCO), where the Board discussed work on sustainability-related disclosures, green-washing and the increasing activity of ESG data providers.

One of the most prominent of these ESG data providers is RepRisk, a very ambitious firm. RepRisk is a pioneer in ESG data science that leverages the combination of AI and machine learning with human intelligence to systematically analyze public information and identify material ESG In fact, just a few weeks ago RepRisk announced that JPMorgan will offer RepRisk’s ESG risk data on its flagship multi-asset data and analytics platform, DataQuery.

A few days later RepRisk announced their partnership with Apex:

“Apex is a very exciting partnership for RepRisk, and one we are especially well-suited for,” said Alexandra Mihailescu Cichon, Executive Vice President Sales and Marketing at RepRisk. “RepRisk is the only ESG provider to systematically cover private companies. While our dataset grows every day, it currently includes more than 120,000 private companies worldwide, in every sector and market. RepRisk looks at what the world says about a company, not what a company says about itself – and in combination with Apex’s analysis on company disclosures and reporting, we’re able to provide a uniquely holistic picture of a company’s ESG profile.”

Following on from this news story, we sat down with Andy Pitts-Tucker, Managing Director Apex ESG Ratings & Advisory to hear what trends influenced their decision to begin working with RepRisk:

“Whilst ESG measurement and analysis has been embraced by public markets and listed businesses over the last few years, in 2020 their counterparts in the private markets have taken notice.

“The dominant trend driving this appetite from private markets is that their stakeholders are demanding greater non-financial disclosure and ESG reporting, ‘pushing’ private equity investors towards ESG. Investors such as pension funds (LPs, the institutions who invest in private equity funds) are now considering the ESG policies of the funds they invest in, as part of their fiduciary responsibilities to their underlying investors. We anticipate that soon private equity firms will be required to pass an ESG screening as part of their vetting process as their investors demand more transparency into the funds’ ESG policies, procedures as well as the non-financial performance of the underlying portfolio assets.

“An often overlooked ‘pull’ factor toward ESG is that private funds are facing pressure from employees who are seeking action from the inside out to make changes which will benefit people and planet, as well as benefitting the financial bottom-line. Private companies are realising that people want to work for, and direct their wallets towards, purpose driven and ethical organizations, that make a positive contribution to the environments and societies they operate in.

“As a result, private markets need a product which enables them to understand, quantify and improve their ESG credentials. In August, we launched our Apex ESG Ratings & Advisory portal, which manages the independent collection of data for investors from their underlying portfolio investments to deliver real time ESG analysis via a secure, intuitive and flexible online platform.”

Focus on Asia Pacific

In November, the team at PwC Singapore launched an ‘introductory guide to ESG for asset and wealth management in Asia Pacific’ where they highlight a multitude of initiatives currently being championed by not only the traditional Asian tigers, but also China itself.

Some of the highlights include:

  • The People’s Bank of China in its latest green bond standard consultation paper removed clean coal projects from the list of green bond financing targets. The removal has garnered positive responses from foreign investors given that China is the largest carbon emitter and the second largest green bond issuer after the US;
  • In 2006, the Shenzhen stock exchange had introduced guidelines requiring a degree of ESG disclosure.
  • The Asset Management Association of China (AMAC) issued China’s first systematic and comprehensive voluntary standard for China’s asset management industry which include guides on approach to green investing.
  • AMAC also released a report on ‘ESG Evaluation System of China’s Listed Companies’ building a core indicator system to measure the ESG performance of listed companies and opening a new chapter in China’s ESG investment practices.
  • In 2018, China initiated a global cooperative project called the Green investment Principles for the Belt and Road, to enhance the infrastructure and economic development across Belt and Road countries.

Pitts-Tucker confirmed that after Europe, Asia Pacific was a big area of focus amongst investors:

Beyond Europe, Asia Pacific is a notable hotspot in the growth of ESG-awareness in the private markets, and we are seeing more firms proactively seeking out initiatives to improve ESG performance. There are significantly more ESG-dedicated funds starting to be launched by asset managers in the region, as well as managers tailoring existing fund products to improve their ESG credentials. We have seen demand for the introduction of ESG metrics from private equity funds in the Asia Pacific region climbing significantly.”

Regulations affecting ESG

In one of our July pieces on the EU & ESG, we discussed upcoming regulations, which Pitts-Tucker shed further light on:

“Supranational bodies and economic unions are introducing new regulation. Notably, we are now less than six months from the introduction of the EU Sustainable Finance Disclosure Regulation (SFDR) in March 2021. This legislation introduces the regulatory imperative for funds to better understand the ESG status of their portfolio investments and will require fund managers to report on the sustainability characteristics of their investments.

“Private equity funds now want to show ESG credentials and compliance voluntarily before they are forced to change by the regulation. From what we have seen, there are some businesses which are well set up and focused on this regulation, however the bulk are nowhere near ready, both in terms of really understanding what it means and being able to comply with the reporting demands.” Pitts-Tucker shares.

“It’s important to remember, that reputation and profit are not only impacted when legal lines are crossed but also when a business crosses a moral line or breaks the social contract it holds which its customers and societies that it operates in.”

The priorities for Private Asset Investors for 2021

With one eye on 2021, and how investors behaviour will impact ESG strategy, Pitts-Tucker concludes:

“Covid-19 pandemic has not impacted appetite for ESG investing and ratings – and in fact has sharpened the focus on risks of all types.  Crucially, once we come out of the other side of the crisis, private asset investors and their portfolio companies are in a unique position to act as change agents to build back stronger economies, and ESG considerations must play an integral part in this rebuilding. Upcoming legislation will no doubt drive the direction in which investors will move regarding ESG strategy but is important to be proactive beyond the regulatory requirements and focus on a strategy that drives change.”

The team at #DisruptionBanking will continue to cover stories about #ESG into 2021 and we hope that our Articles share the need for the industry and the whole of society to embrace the changes that ESG disclosure will mean for the world.

#DataQuery #RepRisk #ApexFS #GreenBond #ESGRatings #PrivateEquity #PrivateAssets #InstitutionalInvestors #SFDR #Disclosure #Regulation #Sustainability

Author: Andy Samu

Read more about Apex ESG here:

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