We want to help private market stakeholders gain a better understanding of their portfolio’s ESG performance and achieve their ESG goals.
Triggered by the need to build a sustainable society, ESG (Environmental, Social, andGovernance) disclosure has become a necessity for all financial actors. Even if regulations such as the EU’s SFDR mainly concern investors of public assets, more and more pressure is reining down on private actors. Whether you are a private equity fund, a venture capital fund, or even a lender, you have to measure and improve your ESG’s performance, meaning the sum of the ESG performance of all your participations in private companies.
Private Equity and Venture Capital firms strive to create value. However, climate change will have an increasing impact on value, investors need to be careful of the ESG performances of their portfolios in order to thrive.
The rapid developing regulations on sustainable finance as well as the rising interest in sustainable assets in general are starting to put ESG on the top of the list of priorities of European fund managers.
Moreover, PE and venture capital (VC) funds are increasingly subject to regulations. Since 2019, the SFDR requires alternative investment fund managers (AIFMs) to make detailed disclosures to the public at both the manager level and at the product level.
In short, the SFDR now requires PE firms to:
- formulate policies at the manager level in respect of sustainability risks
- assess the impact of sustainability on all funds
- specific disclosures for funds classified as Article 8 or “light green” (funds that promote ESG characteristics), or Article 9 or “dark green” (funds that pursue ESG objectives)
According to Amy O’Brien, head of sustainability at Nuveen, for the Harvard Business Review, “The main challenge for many private companies is the lack of capacity and resources to work on ESG integration and reporting. We are almost like consultants for the company.”
1. Disclosure Standard: Even though there are more than 10 ESG frameworks worldwide, there still exists a large measurement gap that is difficult to reconcile. For example, net-zero carbon until recently was a vague concept. Now, emissions footprints can be measured more accurately. Still, collecting quality, comparable ESG data across an investment portfolio is posing real challenges.
2. Lack of Automation: Most private companies don’t have the tools right now to correctly assess their ESG performance. They also lack accurate data on their environmental impact. Therefore, the main challenge for PE and VC firms concerning ESG is about data. The data must be clean and come from trusted and reliable sources. It needs to be accurate. Then, investors must navigate numerous methodologies, frameworks, and approaches to translate ESG policies into concrete, data-driven processes and actions. When it’s hard to start with an easy concept of data disclosure, the development of further progress will be hinged.
When we say ESGDue Diligence, it’s a group concept of data collection, disclosure, analysis and risk mitigation. Like financial due diligence or legal due diligence, ESGDue Diligence assesses the ESG risks that a company may present, and helps PE and VC communicate with all stakeholders across all investment cycles of the portfolio company or target company. It also supports portfolio companies to better prepare for future ESG disclosure and compliance, producing strategic synergy in saving future efforts.
The main challenge for a PE or a VC firm before investing in a company is assessing the risks associated with the company and its business. Which risks is the company facing? To what extent? Those risks might be linked with ESG if the company is evolving in a sector greatly impacted by Climate Change or having a particular social impact.
An ESG Due Diligence can at this point be a great tool to understand for a PE/VC firm the risks associated with the ESG of a company and to analyse the main risks and opportunities linked with the company. A poor ESG policy represents an important potential reputational risk. Companies need a solid ESG policy to create long term value.
Having implemented a successful ESG policy in the companies will allow PE or VC firms to make a better Return on Investment and find a better and more efficient exit strategy. A company with better ESG metrics will have:
- More opportunity to find buyers
- Higher value for IPO
- A better market value
Private debt has also emerged as an attractive asset class for institutional investors in recent years, thanks to its low correlation with other asset classes and its potential to deliver strong risk-adjusted returns. Given the long-term nature of debt investments, ESG considerations are particularly relevant for this asset class.
As with private equity, there is no single approach to integrating ESG into private debt investments. However, one key consideration is the use of “green”or “sustainability-linked” loans. These are loans that are linked to sustainability targets, such as reducing carbon emissions or improving energy efficiency. If the borrower meets these targets, they may be eligible for lower interest rates or longer loan terms. This type of loan can help promote sustainable business practices while also providing financial benefits for borrowers and are now becoming more and more available to small private companies!
FINGREEN AI generates long-term sustainable value creation across all your stakeholders. We help financial actors pilot and integrate ESG at every step of their investment process. We streamline and automate the pain of collecting data from private companies, regardless of size, industry, or geography.
FINGREEN AI ESG Intelligence saves all private market stakeholders hundreds of hours by:
Automatically aligning and benchmarking any financial asset to ESG regulatory and non-mandatory standards
Streamlining and simplifying the data collection process for private companies
Building and customizing your own standards and ESG values profile.
Generate ESG reports and presentations based on different narratives
ESG assessment / analysis for your portfolio, with the option to further ESG Due Diligence on a single asset
Pre-empting ESG scandals with real-time monitoring and weak signals analysis; Key insights on your competitors’ offerings and strategies to identify critical market trends.
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