Emerging ESG Standards Put Pressure on PE to Adapt

If we’re going to prevent future pandemics, reduce the risk of climate change, build a more equitable society, and still generate growth, the responsibility lies on our industry to invest in more sustainable economies and systems. However, when it comes to meeting ESG Standards, the pressure is on as PE/VCs fall further behind the ball, despite increasing pressure to adapt. 

From a lack of data at the fund level to the inability to identify risks and align a mitigation strategy, firms are facing a number of challenges in aligning to the ESG standards both consumers and investors are looking for. 

Where the Industry Is Falling Short

In the past few years, there has been a massive shift in consumer expectations toward ESG-aligned values. This includes consumers thoroughly researching a brand before buying to learn how they purchase goods, as well as the companies and merchants they support, to help determine where to spend their dollars. Whatsmore, ESG is commanding more attention at the board level as firms shift to align their investment strategies with ESG values. 

However, PE/VCs are behind the ball when it comes to standardizing data points for what truly deems a brand as ESG aligned, as well as supporting brands that are integrating more sustainable investments, economies, and systems. And, when it comes to reporting on these measures, the industry falls short in relation to effective and transparent ESG metrics – now a key consideration for all private equity investors. 

As the world shifts toward more integrated reporting and auditable sustainability reporting, investors will be forced to produce nonfinancial data according to certain reporting standards. If PE/VCs can’t meet and adapt to the growing needs of their investors, they’re putting themselves at risk of being left behind by the competition.

Rating ESG Performance Is Not a One-Size-Fits-All Approach 

The industry is heading toward standardization in measuring ESG outcomes, and investors are becoming better equipped to ensure firms are putting ESG into practice. However, GPs and LPs have stated that their biggest challenge in rating ESG performance is how unclear it is to standardize, define, and measure overall impact and outcomes, especially given how different industries have varying aspects to measure. As such, LPs and GPs each have their own set of standards when it comes to rating investors’ ESG performance.

For example, measuring the use of carbon emissions to quantify climate impact can be cut and dry. But, when it comes to measuring human rights and labor standards, the data can become pretty gray and is not a one-size-fits-all unit of measurement. As a result, LPs are starting to dig deeper into ESG policies and asking tougher questions about a firm’s ESG efforts.  

A Shift From Compliance to Creating Value 

When ESG standards began gaining traction, PE/VCs were just trying to adopt them and comply. But now, as investors voice interest in valuing funds that offer positive environmental and social impact, they’re leveraging ESG standards and ratings to create value. 

It’s up to PE managers to demonstrate that the ESG initiatives they launched are delivering both financial and nonfinancial returns and to fill in investors on whether or not ESG measures have created value. For example, by adopting SDGs as a framework for achieving positive societal outcomes, PEs can create value by demonstrating a stronger investment through ESG activity.  

By embracing a proactive ESG mindset, transitioning to sustainability can be a lever for positive transformation, and turns ESG alignment into a real business opportunity and lever for growth.

Adapt and Align To ESG Standards With Altvia 

To stay ahead of the industry, firms can leverage ESG standards to create more value for investors, and it starts by setting a strategy to incorporate ESG values into the business’ growth plans. 

Begin with setting a clear roadmap and growth targets for sustainable value creation. At the portfolio level, that includes engaging with management teams to integrate ESG into value creation plans. When sourcing new deals, firms can analyze ESG risks during due diligence and bake in opportunities to value creation plans. 

While there isn’t a standardized common metric to measure ESG standards yet, PE/VCs are leveraging platforms like Altvia so they can gather information at the portfolio level to analyze both financial and non-traditional data to see the full picture. 

To centralize all of your ESG data into one platform, while providing transparency and value-adding reports for investors, contact a member of our team to see how Altvia can help. 

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A traditional crm was built for general ‘customer’ scenarios

Software platforms have made the world a better place by making work a better place. Indeed the world is better off when people enjoy their jobs even marginally more, and workplace applications on big CRM platforms like Salesforce.com have done that and much more.

But the potential that platforms like these offer presents diminishing returns: once the platform provider has engineered too many industry specific components into its platform, its usefulness for other industries begins to be threatened, and with that so do the usefulness of the component tools built into the platform.

So it is with the CRM category that Salesforce.com has defined: it is generic enough to work for many industries, and yet still offers the potential for others to round off the edges and nail more vertically-oriented and extremely tailored software solutions.

Private capital markets are actually a great demonstration of this dynamic. Where generic CRM platforms simplify — appropriately so — to assume there’s a business, a customer, a sale, and service of that customer, there are a few industry-specific pieces that are missing.

Take for example, that investors become customers by investing through legal entities the GP raises. It’s a subtle but important nuance that just doesn’t make sense at a platform-as-a-service level (because it’s overly complicated for a simple one-time sale that many industries require), but which can easily be added without 10 years or software engineering. Once provided, the rest of the platform’s components become tremendously powerful again and you’re set to take over the world.

As a traditional CRM in our pillars methodology, these nuances must be present to properly account for investors in these legal entities, potential target companies and which are owned by these entities, the context of all interactions with these parties (as well as the appropriate overlap, ie co-investments), and how you’re arriving at finding these opportunities on both sides of the equation, such that you’re able to piece together what’s effective and what’s not. Not just because we say so, but because these are the very relationships and data that are key to the motivation behind a CRM in any industry.

It’s critical, too, that the valuable publicly-available information that helps to enrich CRM systems and save users painful steps of entering it themselves is fully-integrated at the platform level.

Again, look no further than the 3,000+ pre-built integrations that Salesforce.com — the creator of the CRM platform concept — has at a platform level to do so, and which only exists by way of holding just short of overly-specifying certain industry workflows that would present challenges to properly integrate.

Stakeholder reporting and communication (investor relations) draws on a range of datasets

The traditional “customer service” model of CRM systems once again makes overly-simplified assumptions about the customer relationship when applied to private capital markets.

In fifteen years I personally have yet to hear the terms “warranty” or “service call” in this market because it’s just not the same. But make no mistake, as uncomfortable as it may be to say aloud, customer service is more important now than ever and it’s constantly happening; the industry is, after all, considered to be a financial “service”.

As it turns out, that service is primarily information-based — it’s driven by data and takes the form of reports and analysis that drive decisions, and then end up again in investor-facing reports and analysis.

The foundational elements of a private capital markets CRM must be built such that they accommodate this data (like we discussed above), but so too that it can accommodate additional supporting data that investors (customers!) need in the context of service.

Oftentimes this supporting data — financial metrics and time-based values, for example — is believed not to meet the traditional definition of CRM and the natural thought is “well, better do this in Excel!”.

While I happen to believe Excel is still the greatest software application ever built, its introduction to this value chain we’ve discussed herein actually creates the problem many firms suffer from: key data needed to provide customer service (again: effectively the entirety of a firm’s reports and analysis) is now in disparate systems and detached.

Both of those dynamics are important and distinct: not only is this supplemental data disparate, but when brought together there is no logical association that can be made between the two data sets.

Allow me, then, to make the point very simply: not only can this financial and time-based value data (you may be thinking about is as “portfolio monitoring” or “accounting”) be a part of a CRM, it is arguably the most important part of a CRM because it’s at the core of what providing service to the customer entails — information that comes out of data!

Firms need a digital method to engage stakeholders (ie investor portals)

Investor portals are not new; in fact, for many of us — including myself — they conjure up horrifying nightmares in which we’re aimlessly guessing at folders to find the newest document we need.

So in lies the opportunity: not only have the portals we’ve come to hate not simplified the process of acquiring information, they’ve failed to create an entirely new experience that is “customer service” driven.

To be fair, this is not a B2C market where you’d be long out of business for not having focused on customer service and thus the customer’s technology-driven experience. But don’t expect to be around too much longer if you aren’t thinking about this shift.

Today’s institutional investors increasingly expect this same consumer-like experience, and a massive opportunity is being missed by not providing it. It’s not about providing them the experience they desire; it’s more about the ability to measure engagement that is had in return.

Put simply: what’s keeping the market from providing this experience is the availability of the information that’s required to create the service that provides the experience.

If you’ve hung in this long, you know that by focusing on your CRM, you have the data that’s required to manage the customer relationship and the technology-driven experience through which that information is shared to create a differentiated and opportunistic customer experience.