Environmental, social, and governance (ESG) considerations are quickly becoming a non-negotiable component of investment decision-making. As private market investors seek to maximize returns while aligning with socially responsible practices, the ability to harness ESG data creates an unprecedented opportunity.
Understanding how to analyze ESG data is a critical step to gaining valuable insights into a portfolio company’s risk profile, growth potential, and overall resilience in the face of an ever-evolving market landscape. To dig deeper into this topic, Novata and Private Equity Wire recently hosted a webinar on analyzing ESG data and understanding performance on the metrics that matter.
Moderated by Sarah Green-Vieux, Head of Education and Research at Novata, the discussion featured panelists from across the private markets, who shared their perspectives on analyzing ESG data, data collection, and prioritizing portfolio engagement opportunities. Speakers included Avantika Saisekar, Managing Director at Wafra; Sanaz Raczynski, Managing Director, Sustainability, at Kohlberg; and Dakota Gangi, VP, ESG & Sustainable Investing Strategy at Angelo Gordon.
Below are key takeaways from the conversation on how investors can leverage insights from ESG data to inform portfolio engagement.
- Understand core objectives
Effective data analysis begins with clarity around what you are trying to measure and why it is important. Take time to outline the primary objectives for data collection, such as ESG risk management, impact measurement, LP reporting, or financial value creation. The materiality of portfolio companies is also an important consideration as risks and opportunities will differ by sector. Understanding these factors will inform how you approach data collection and interpret performance on the metrics that matter to stakeholders.
- Set clear expectations with stakeholders
You can only analyze the data you collect, so setting clear expectations with stakeholders early on is essential. The panelists noted that investors must balance data collection efforts and the risk of overburdening management teams with data requests. “Take advantage of an opportunity for an open and honest dialogue [with LPs] about current expectations, current approaches to your plans, and strategies to grow into the future,” Angelo Gordon’s Dakota said. Similarly, engage with portfolio companies so they understand the value of collecting the data and develop the infrastructure needed to collect and share it accurately.
- Incorporate ESG early in the process
From a portfolio company perspective, Wafra’s Avantika noted that setting ESG expectations from diligence changes the narrative of ESG being an add-on request. Incorporating a reporting requirement in legal documents that allows flexibility on the questions investors ask can also improve data collection year-over-year. “ESG moves quickly, and so do LPs, so making sure portfolio companies are also dynamically able to understand those requests is important,” she said. Integrating ESG at the due diligence phase can identify potential risks early in the investment lifecycle and ensure the team is prepared to make decisions accordingly. Investors can also take the opportunity to ensure ESG risks are reflected in the pricing of the deal.
- Align engagement priorities to the needs of the company
When it comes to mitigating risks and revealing areas to improve financial value, companies will have different opportunities. ESG data analysis is key to identifying where improvements can be made. At Kohlberg, for instance, Sanaz noted that the firm prioritizes its engagement during ownership based on the commercial needs of the portfolio companies and their ESG maturity (i.e., how familiar they are with ESG and the resources they have to execute actions). “While our engagement process is consistent, and we have committees and formal meetings, our actual involvement is really dependent on the needs of the portfolio company — and that’s based on how mature the company is in ESG and how much they need ESG from a commercial perspective,” she said. The firm’s ESG team and deal teams work in tandem to uncover opportunities and prioritize new practices or changes that improve efficiencies and overall value.
As investor expectations around long-term sustainability increase, a comprehensive ESG strategy during the ownership period can improve exit valuations of a portfolio company. “ESG risks are investment risks,” Wafra’s Avantika noted, adding that companies that don’t consider these factors may not have the exit they are looking for. “In this environment right now, it’s important that you’re looking at ESG, not even just ESG separately, but almost entirely in your ownership period of what you’re going to do in your value creation program.”
Watch the webinar replay to see the full conversation on analyzing ESG data. For more insights on improving performance with ESG data, download Novata’s eBook, “From Collection to Action: A GP’s Guide to Creating Value with ESG Data.”