October 26, 2022

ESG Trends in Private Markets: Lessons from Fall 2022 Industry Events

This past September, Novata joined hundreds of limited partners (LPs), general partners (GPs), and senior decision-makers in the private equity and private credit spaces at a number of industry conferences. The events brought together leaders to share the latest perspectives on pressing issues in private markets, including ESG and Diversity, Equity & Inclusion (DEI). 

Scott Kennedy, President and Chief Sustainability Officer at Novata; Kyle Flick, Director of Methodology at Novata; and Sarah Green-Vieux, Head of Research and Education at Novata participated on various panels that shared insights for effectively implementing an ESG strategy at a firm. Below are our top takeaways from their panels and other sessions on the latest ESG and DEI trends in private markets. 

  1. Alignment on ESG metrics is pushing progress on data collection. ESG data collection and reporting has been a fragmented process, but the past year has seen the industry move closer to aligning on metrics. During his session at Informa’s SuperReturn Private Credit US event, Scott highlighted the importance of clarity and alignment around specific frameworks to improve performance on ESG. As he pointed out, the SFDR’s Principal Adverse Impact indicators, for instance, are now metrics that matter. The ESG Data Convergence Initiative, which brings together leading global GPs and LPs to align on a standardized set of ESG metrics, is another notable source of industry convergence. 
  2. ESG can be a competitive advantage for private credit lenders. Speakers at SuperReturn noted that rising interest rates are enabling private lenders to offer credit solutions at lower risk for higher return. Growth-stage companies are looking for partners to help them grow their business, and private credit firms can create a competitive advantage by aligning their ESG approach with buyout sponsors to reduce the burden on borrowers.
  3. Considering ESG factors in investment decisions should be built into the process for all investors. Stakeholders, including customers, are already paying attention to progress on ESG factors. These considerations reduce risks while enhancing risk-adjusted returns. 
  4. Improving DEI is a continuous effort. At the PEI Responsible Investment Forum, speakers noted that data can help firms unlock a strategy to help them address their unique DEI needs. Measuring and reporting on DEI progress is critical to ensuring efforts are working and leading to desired outcomes. 
  5. Specificity around ESG initiatives builds trust. When speaking about ESG initiatives, speakers at the PEI Responsible Investment Forum advised against using generic and vague commitments, such as “net zero.” Instead, firms that have made commitments should be specific about where they are in their ESG journey and use relevant data to demonstrate their progress. Doing this will help maintain trust and transparency with stakeholders. 

As the global demand for ESG data grows, incorporating ESG into a private credit or private equity strategy is as much about reducing risk as it is about value creation and increasing profitability. At Novata, we’ve seen how firms can position ESG as a competitive advantage to create benefits for investors and portfolio companies. It can be challenging to develop an ESG strategy from scratch, so starting small and building up over time can lead to successful ESG integration for firms. To learn more about Novata and how we can help your ESG journey, reach out to us

Novata Team