As the PE/VC industry shifts toward more targeted sustainability goals, the demand for ESG data has grown. Transparency and accountability are at the foundation of the shift toward more responsible and sustainable investing. More investors are demanding that ESG investing processes and paradigms be implemented as they are inextricably linked to value — moral, ethical, and economic. And managers are starting to feel the pressure to prove their products and brands are ESG-aligned.
However, the industry is behind in standardizing data and creating benchmarks to identify ESG-aligned firms. While regulatory frameworks are likely to emerge over time, PE/VCs can get ahead of the curve by focusing on how to put ESG data to work now.
Start with a Solid Data Strategy
No matter where firms concentrate their ESG data relationships, a properly data-supported investment strategy will allow institutional investors to leverage insights and meet their ESG goals. To keep up with the increasing pressure to adapt to ESG standards, firms can implement transparent, data-driven investment strategies that enable investors to make sense of and leverage data to meet their goals.
While there is currently a lack of standardization surrounding the metrics to track and compare brands (as well as how to act upon the insights from that data), firms can get a jumpstart by defining a few core benchmarks within their data strategy:
- Screening: During due diligence (and before), firms should be running an internal analysis based on predetermined data points to see if a company meets the internal expectations of ESG alignment. This analysis will help determine if a company meets the ESG goals of the firm.
- Knowing Risk and Performance Drivers at the Fund Level: To best measure performance, firms should have a clear understanding of their internal ESG goals and benchmarks to track against and be ready to share them with investors asking for customized ESG reporting.
For example, one investor may request reports relating specifically to gender equality guidelines, while another may be more focused on carbon emission risks. By having data sets and benchmarks to measure at the fund level, firms can quickly pull custom reports to gain investors’ trust (not to mention help them cut through any greenwashing concerns). - Portfolio Optimization: By leveraging a customizable, VC-specific data tool (like Altvia), firms can forecast industry changes and “what if” scenarios to best project potential portfolio risks and opportunities and better understand how they impact different ESG scores within their portfolios.
- Reporting and Benchmarking: Having the right benchmarks and reports in place throughout the deal funnel helps investors see the big-picture look at how they’re aligning to, and progressing with, ESG goals over time.
The right reports can reveal everything from the performance of each ESG pillar overtime to help fuel better decision-making when it comes to new opportunities and ensure each new deal brings the firm closer to achieving ESG-aligned goals.
Long-Term Leverage Lies in Unstructured Data
To leverage ESG benchmark data, the key is to look for the longer-term impacts telegraphed in unstructured data, which can take the market a while to assimilate because of inefficiencies in processing ESG information.
Instead of waiting for standardization in ESG reporting and compliance framework, fund managers can start gaining insights today from alternative data found in reports on verticals like climate change, natural disasters, and other public information.
Partner to Stay Ahead
While unstructured, raw data can be difficult and time-consuming to weed through, PE/VC specific software makes it easier to analyze alternative data to stay ahead of the competition.
From newspapers and social media feeds to satellite images and nonprofit research, ESG data is readily available. It’s up to firms to determine which information provides them value.
By partnering with a software provider like Altvia, firms can gain a competitive edge in generating fund-level reports for investors on ESG data that may not yet be available in the market. To see how a platform like Altvia can help your firm level up your ESG goals and reports, contact a member of our team today.
