ESG in Private Markets

ESG in Private Markets: From ‘Nice to Have Niche’ to ‘Must Have Mainstream’
From the Apex ESG Ratings & Advisory and Mishcon de Reya webinar on ESG in Private Markets.

Though ESG has been increasing in profile over many years, the focus in the past has
largely been on purely environmental factors and risks. This year, world events have driven
much higher awareness of social and governance factors, which now share equal

“The level of awareness has been escalated by the pandemic,” says expert panellist, Alex Rhodes, Head of Mishcon Purpose at Mishcon de Reya. “Everybody is looking at their businesses, how they’re structured and how they’re run. How do you reshape your business, so that it is fit for purpose for the recovery coming out of this crisis?”

It is questions like this that demand urgent answers not just from the companies themselves but also from private market investors. Rhodes summarised the important function that investors play in driving the ESG agenda, saying, “The role of the financial services sector has been around the deployment of capital and the allocation of capital. The investment sector has been a major driver for setting standards and driving change in corporate behaviour.”

Four ESG data challenges in private equity
In fulfilling this crucial role, there are numerous challenges for a private equity fund. Andrew
Pitts-Tucker, Managing Director at Apex ESG Ratings & Advisory, identified four
specifically: “Firstly, there are a huge number of global standards. There are a lot of people
vying for their position as best-in-class, there are many stakeholders using different ESG
approaches and posing different data demands.” A fund might need to report on ESG to 20
different stakeholders but, ideally, will want to produce one report that can satisfy all of their

The second challenge is data collection’. Pitts-Tucker described companies currently holding
ESG data in everything from Word documents to physical lever arch files, where it is near
impossible to use and compare meaningfully. As a solution, he said, “A system which allows
you to collect data in a more user-friendly format is crucial.”

Once this challenge has been addressed, the next he identified is the question of, “Once
we’ve got the data, how do we turn it into meaningful action, so we can work with our
companies to make them better organisations for people and the planet?” It is in answering
this question that firms can move their ESG activities beyond a box-ticking exercise.
This leads to the fourth challenge, of avoiding ‘greenwashing’ or purpose washing. Pitts-
Tucker posed the question, “How do we ensure to our stakeholders and to the public that
we’re not just doing something because it looks good? We want to really show them that we
mean what we say.” This takes time and commitment, he says.

Keeping pace with regulatory developments
An important piece of legislation that many firms will be anticipating is Regulation (EU)
2019/2088 on Sustainability-Related Disclosures in the Financial Services Sector, which
comes into force in March 2021.

Rhodes explained to journalists, “It requires firms to make strategic business and policy
decisions regarding their approach to ESG, and then for that to be disclosed on the firm’s
website and in pre-contractual and periodic disclosures.”

Rhodes and Pitts-Tucker agreed that in many ways, ESG is a label for a set of long-term
risks that firms have always had to recognise and manage in making investment and
operational decisions. But the nature of the ESG space, which Rhodes described as “slightly
encoded and noisy”, adds complexity to the task of reporting and disclosure as described

Rhodes had praise for numerous private equity funds that are well prepared for this incoming
regulation. “There are some businesses which are really set up and focused on this, and not
just from a compliance-led approach but from a purpose-led approach, in the way they
decide to do their business in every regard.” However, he cautioned that “the bulk are
nowhere near ready, both in terms of really understanding what it means and being ready to
swing into gear to comply with it.”

Two steps to prepare for regulation changes
Rhodes recommended two crucial steps for firms to prepare for the change in regulation.
The first is for private equity investors to adjust their collective mindset to a new approach.
This involves “getting your head around new concepts, for example, the concept of
sustainability risk, which is defined as an ESG event or condition that, if it occurs, could
cause an actual or potential material negative impact on the value of an investment.” For
firms not yet operating with that in mind, it’s a significant shift in priorities, which needs to
come from the top, and, Rhodes said, “there’s this new thinking that really needs to be
worked through at a senior level.”

Rhodes’ second recommendation is a review of “the resource that companies need to
allocate and the systems that they need to get on board”, which can sometimes be
underestimated. “They will have to collate accurate and comprehensive information, not only
on existing portfolio companies but also on ones that they want to invest in,” he continued,
which can come with a substantial increase in workload and technological requirements. A
helpful solution he suggested is “a platform that allows companies, in a cogent way, to
prepare for the obligations as they’re coming in.”