Creating Value
with ESG Data
ESG data can provide a holistic view of portfolio company performance across key metrics that are relevant to the firm. According to 2021 reporting data from the Principles for Responsible Investment (PRI), 88% of investors used ESG factors to identify risks that affected investment selection. Considering ESG factors at each stage of the investment lifecycle creates opportunities to improve financial value and performance of portfolio companies.
Fundamentally, ESG considerations lead to better risk management and value creation by helping investors account for material risks—such as climate change or looming regulatory requirements—and identify opportunities to increase the profitability of portfolio companies.
PRE-INVESTMENT
POST-INVESTMENT
EXIT
Get a comprehensive due diligence assessment with insights into how companies account for existing and emerging material risks, e.g., waste and water management concerns for a manufacturing company or privacy and data security for technology companies.
Inform engagement with portfolio companies to mitigate operational and reputational risks, drive impact, and improve valuation upon exit, e.g., recommending actions to improve operational efficiency, lower energy use, or create inclusive workplace cultures.
Improve valuation at exit as private equity executives increasingly expect an ESG premium in companies they are considering exiting. A company’s ESG performance can impact its valuation, and GPs that have already engaged portfolio companies on ESG will be able to answer long-term sustainability questions.
June 20, 2023Source: Private Market Talks Podcast
For private market investors, creating value with ESG data begins with collecting the data, then analyzing it to identify risk management and value creation opportunities, and acting on the insights.
Collecting high-quality, comparable data from portfolio companies is the foundation for creating value with ESG data. However, before collecting data, it is important to develop an ESG strategy that outlines what ESG metrics are important to the firm. Outlining these metrics aligned to an ESG policy can help create internal alignment on data, ensure consistency in reporting, and enable investors to identify opportunities to mitigate risks and create value for portfolio companies.
ESG metrics can be complex to collect, so providing portfolio companies with standardized guidance can help investors feel confident in the consistency of responses from portfolio companies. Using a technology solution can help streamline this process for portfolio companies, making the data collection process simpler and more effective.
Automating data collection
Managing large volumes of data
Making sense of my portfolio’s ESG data
To generate insights from ESG data, investors need the ability to successfully contextualize this information. Reviewing the data against the topics most relevant to the firm will enable GPs to quickly assess how portfolio companies fare on these topics and provide a sense of expected results. For instance, investors may expect portfolio companies to already be working toward an ESG goal based on considerations from due diligence, or have specific requirements for certain funds.
Looking at an ESG data set in a vacuum will not review much. Accounting for normalization factors (such as revenue, number of employees, or country of operations), benchmarks, and portfolio company materiality will help provide the context necessary for gathering actionable insights. Benchmarks, for instance, will reveal areas where portfolio companies over- or under-perform on certain topics, enabling GPs to set data-driven targets and track progress.
During the ownership phase of the investment cycle, investors have a crucial opportunity to help portfolio companies mitigate liabilities and act on opportunities to improve performance. The insights from analyzing ESG data are important to the work done in this stage. When outlining the key opportunities for each portfolio company, it’s important to determine which ESG metrics or goals are the most relevant, timely, and impactful for improving ESG and financial performance at the company. Some questions to help determine how to effectively engage with portfolio companies include:
Benchmarks are a critical tool in an investor’s analytics toolbox for understanding ESG performance. Novata Benchmarks are the private markets’ broadest collection of ESG benchmarks, with 50 universal and more than 200 sector benchmarks for the 2022 reporting period. These benchmarks are built on reported data from Novata contributors,
de-identified and aggregated, and specific to the private markets.
Easily compare your portfolio’s performance to peers and gain clear insights to help you mitigate risks, take action, and communicate value. Learn how you can unlock the full picture of your portfolio’s ESG performance with Novata Benchmarks.
