As part our effort to make private capital more sustainable and transparent, we designed a model to measure and compare ESG factors across the industry. Here, we look at how basic firm-level governance sets baseline expectations for ESG transparency

As part of Preqin’s ESG Solutions effort to make private capital more sustainable and transparent, we designed a model to measure and compare ESG factors across the industry. Here, we look at how basic firm-level governance sets baseline expectations for ESG transparency

Preqin’s ESG Solutions model provides a standard score for how ESG factors at a firm, portfolio, and asset level are measured, compared, and communicated. The assessment is based on binary true/false assessments across 37 unique indicators most relevant to private markets.

Here is the easiest way to interpret what each level the model is measuring for:

  1. Know who runs your money (Firm): 16 indicators
  2. Know how they run your money (Portfolio): 12 indicators
  3. Know what the risks are to your money (Asset): 9 indicators

Before we can interpret the data from the model, we have to consider our expectations. The dataset is new, representing an initial snapshot in time, and therefore does not provide an immediate historical context. This is where our expectations come into play. For example, on a firm level, would we expect a GP to disclose its owners, or how many of its directors are women, or if it mentions any commitment to ESG?

Our expectations reflect who we are as investors or managers. An experienced ESG investor would absolutely require full disclosure on those questions. On the other hand, an investor or manager new to the concept of ESG may have no expectations at all. Lastly, an investor hostile to the concept of ESG might expect (or hope) the answers to these questions would be extremely limited.

 

 

To set a reasonable baseline of expectation, let us start at the top and look at the most rudimentary questions in terms of firm-level governance: who owns the firm, and who runs the firm? In our model, we see that 90% of firms disclose ownership while 70% disclose leadership (Fig. 1). Already, expectations must be adjusted to this new baseline. If only about two-thirds of firms disclose who makes the decisions, then expecting robust disclosure on other, more obscure details on the portfolio and asset levels would be ambitious. Most investors would not. 

The final barometer for setting expectations is with the concept of ESG itself. The model asks if there is any mention of ESG at all on the firm’s website, in presentations, in the media, etc. – quite a low barrier for entry. Considering our previous test, where just seven in 10 firms disclosed leadership, we should expect an explicit mention of ESG to be lower. But how much lower? In this case, only about one-third (35%) of firms showed any mention of ESG at all. 

 

 

So, without the benefit of historical data, we can use these three basic buildings blocks to set our expectations for the rest of the dataset. Now that there is some understanding of who runs your money (Firm), knowing how your money is run (Portfolio) is the next logical area of enquiry. And if we use the ‘any mention of ESG at all’ barometer of 35%, expectations for overall scores should be tempered accordingly.

In our next blog entry, we will take a closer look at the next tier of the ESG process: portfolio-level commitment. Does the data suggest a kind of ESG greenwashing, or are well-intended managers committed to sustainable and socially conscious portfolios?

 

If you’re interested in learning more about our 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.