What ESG Transparency in Portfolio and Asset Governance Can Tell Us about ESG Commitment

Could a lack of ESG transparency be a sign of greenwashing, or does it point to the continued evolution of an industry still learning what ESG means and how to fully commit?

As part of Preqin’s Sustainability Solutions effort to make private capital more sustainable and transparent, we have designed a model for measuring and comparing environmental, social, and governance (ESG) factors across the industry. The data provides a highly detailed and comparable breakdown of ESG profiles across LPs, GPs, and funds.

In our first blog entry in the series, we looked at how basic firm-level governance sets baseline expectations for ESG transparency. This time, we take a closer look at portfolio- and asset-level data in our ESG Solutions model. Does the data suggest a kind of ESG greenwashing, or is something else at play?

What the Data Can Tell Us
The true heart of Preqin’s ESG Solutions effort is to test the transparency, or lack thereof, around ESG-related issues. One potential result of this could be to root out potential ‘greenwashing’ – where green marketing is deceptively used to obfuscate operations which are, in fact, environmentally agnostic – by examining how ESG is managed at the firm, portfolio, and asset levels. The scores, based on the number of ‘true’ responses to the questions posed, are the percentage of positive responses, with 100% representing full transparency.

The easy interpretation of Fig. 1 is that the decrease in transparency from the firm to asset level represents greenwashing. But is that the right conclusion? ESG principles and concepts are relatively new and foreign to most investment and financial professionals; to some of us they may be a given, but this does not reflect the greater reality. 

As we discussed in our first article, transparency at the firm level can be a low bar to clear. Disclosures on assets under management (AUM) and board composition, for example, are relatively easy, and often basic, procedures for many managers. Transparency wanes, however, when pressed on practices like managing ESG goals within portfolio companies (asset governance) or managing sole-focus ESG or impact funds (portfolio governance). Maybe ESG implementation is more than flipping a switch.

ESG Takes Time
At its best, ESG implementation is a slow and steady grind. It takes time to develop the data and research to prove the concept, more time to convince non-believers of its use-value, and yet even more time for actual implementation. The following example of ESG adoption at the asset level demonstrates this point: the world’s largest proxy advisory firm, ISS, released its Proxy Voting Guidelines Updates for 2021 in November 2020; several policy changes (like the one on gender diversity) do not come into effect until February 2022. Even in a world where practitioners are fluent in ESG, implementation takes time.

To highlight this concept, the UN’s Principles for Responsible Investment (UN PRI) – a set of six responsible investing concepts and a network of investors that have committed to implementing them – has reached nearly 2,500 signatories since 2006, and has come to represent over $100tn in AUM (Fig. 2). While this growth suggests that investors are embracing sustainable investment practices and are increasingly considering ESG factors in their investment strategies, it also clearly demonstrates the slow and steady pace of adoption.

By proxy, we can expect Preqin’s ESG Solutions transparency scores to follow a similar pattern as seen in Fig. 2. That is, first the implementation of policies internally and then the implementation of policies externally. As the dataset evolves, the time series of these scores will give a true insight into any greenwashing practices. The argument will fade if we see even growth across all three levels of firm, portfolio, and asset governance. But a disproportional rise in the average firm governance transparency score relative to its asset and portfolio governance counterparts would force us to revisit the possibility of greenwashing.

If you’re interested in learning more about ESG Solutions, take a look at our ESG homepage. Alternatively, if you’d like to receive regular updates on our ESG activity, you can sign up here. Finally, if you’re looking to learn more about our ESG methodology, you can download an overview.