It can be hard to determine what different ESG affiliations signify about a firm. Here we unpick what each one means for investors and fund managers
The different affiliations and how they help industry players signal the extent of their commitment to ESG goals
ESG affiliations can help investors identify firms that align with their ESG standards. But not all affiliations are the same. Some are stricter than others, requiring higher levels of commitment, or that certain criteria are fulfilled. For instance, a more stringent affiliation might require firms to submit detailed roadmaps and carry out annual reporting as a means of demonstrating actual progress.
At the other end of the spectrum, some affiliations will only require firms to pledge their intent without having to prove that they are taking concrete actions. Therefore, by understanding the relative stringency of ESG affiliations, LPs can easily comprehend just how committed different firms are.
Affiliations also serve to combat greenwashing, particularly the stricter ones. Preqin’s ESG Solutions currently tracks more than 40 affiliations relevant to investors in alternative assets. We classify affiliations into three groups, depending on how stringent they are: low, medium, and high.
High
Highly stringent affiliations typically require proof that members are taking actions toward ESG goals through public disclosure of both practices and performance.
For instance, Ceres tracks shareholder resolutions filed by members of the Investor Network, focusing on the climate crisis, energy, water scarcity, and sustainability reporting. In addition to publicly acknowledging that sustainability is a business imperative, members are required to disclose specific and measurable information, such as Scope 1, 2, and 3 greenhouse gas emission reduction targets, policies to conserve water, and targets to improve minority representation.
Industry players currently affiliated with Ceres include public pension funds California State Teachers’ Retirement System and California Public Employees’ Retirement System, as well as Swiss bank Pictet Group.
Medium
ESG affiliations with a medium level of assessment may require a signal of intended action toward ESG goals, and even some reporting, but possibly not as frequent reporting and rehashing of commitments as those with a high level of stringency.
For instance, the Global Real Estate Sustainability Benchmark (GRESB) provides validated ESG performance data and peer benchmarks for real estate investors and managers to use when improving business intelligence, industry engagement, and decision-making. Members are required to pay an annual fee and report annual data to the GRESB, but there is a grace period to keep results confidential for the first year if they so wish.
Fiduciary Duty in the 21st Century is also in the ‘medium’ category. Members must sign the investor statement, which includes commitments to act with due care, skill, and diligence, and take ESG issues into account in investment processes and decision-making. However, there is no need to carry out frequent reporting.
Low
Finally, ESG affiliations that we classify as having ‘low’ stringency include groups that are set up for networking and knowledge-sharing purposes. They typically do not require any reporting.
One example is the Global Impact Investing Network. Members are required to make or plan to make impact investments, or at least support those who do. It provides networking and resources without tracking members’ progress. Similarly, the International Corporate Governance Network aims to inspire effective corporate governance and investor stewardship standards and practices, only requiring members to read the membership declaration when signing up and submit an annual fee.
Evaluating companies through the lens of affiliations can therefore help firms and LPs better understand relative commitment toward ESG. For an introductory guide to how affiliations help to signal intent around ’environment’, ‘social’, and ‘governance’, read the first of our two-part project.
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