Coauthored by: Lorraine Spradley Wilson, Chief Impact Officer and Head of ESG at Novata, and Amanda Bangs, Head of ESG Partnerships and Programs at Novata
In 2022, many private market participants developed a strategy to meet the increased interest in transparency on ESG issues from their stakeholders (LPs, employees, industry groups, etc.) Looking forward to 2023, we are highlighting 4 areas that we believe will be most relevant to ESG disclosure and integration in private markets.
These 4 areas include:
1. increased mandatory disclosure requirements,
2. a new focus on understanding your company’s supply chain,
3. an ongoing public debate on the relevance of ESG disclosure, and
4. a focus on efficiencies in order to report.
Increased mandatory disclosure requirements, and a higher bar for voluntary disclosure
Private equity and private credit firms are increasingly incorporating ESG factors into their investment products and strategies. What has changed, and what will continue to gain traction in 2023, is mandatory disclosure requirements from regulators. To counter the rise of greenwashing, regulators across the globe have landed on metrics and definitions that they would like to see funds employ in their reporting. You can learn more on the subject as it relates to APAC here and SFDR’s Principal Adverse Impact indicators in Europe here. Novata participated in the comment period for the U.S. Security and Exchange Commission’s proposed climate rule. You can read our comments here. Additionally, the International Sustainability Standards Board (ISSB) recently unanimously confirmed that Scope 3 emissions disclosure will now be a required disclosure in its voluntary reporting framework. Privately held companies will increasingly need to focus on carbon accounting in order to respond to requests for information from the publicly traded companies with which they do business.
Understanding your supply chain
Transparency expectations across value chains extend to the supply chains of private companies. Therefore, we expect more portfolio companies to focus on developing a strategy for reporting and to collect data on their supply chains in order to share this information with customers, investors, and other stakeholders. We’ve seen a significant level of interest from GPs requesting metrics in this area. GPs want to understand how portfolio companies are vetting suppliers, setting expectations and monitoring performance across key ESG issues. In particular, human rights policies and environmental impacts in supply chains (e.g., degradation of high biodiversity value areas) are gaining traction in the private markets.
While disclosures have increased, there is still opposition. State level and legislative branch opposition to ESG will likely continue.
Texas made headlines this past fall when it decided to boycott financial institutions over their ESG policies. According to a study from Wharton, the decision had an impact on competition in the bond market — driving down competition for borrowing and costing taxpayers millions in extra interest. While some legislators and regulators are making major strides to require ESG reporting, there are still areas where the situation is unclear and the merits aren’t considered. Novata believes that taking into consideration ESG factors is part of an investor’s fiduciary duty. You can find resources related to the different metrics and themes we cover on the educational section of our website.
Report requesters and providers will look for efficiencies
Data requesters and providers will continue to look for efficient ways to report through holistic software solutions. Over the past year, we’ve held more conversations with investors looking for easier access to decision-useful ESG data. They want to make informed decisions about the companies they are vetting and the companies they already own. They’re also interested in meeting the needs of their stakeholders and reporting on their corporate operations. Time is often of the essence and speed and accuracy are key. Software opens up more options for analysis and benchmarking — both of which are available on the Novata platform.