Comment: Keep your head in the cloud to track ESG

Adoption of ESG policies and procedures is stretching private equity resources. The values-based approach leads to a deeper level of investor scrutiny, transparency requirements, and operational procedures. At the same time, dealmakers try syncing with the latest issues and innovations to identify growth and capture value without compromising returns or speed of execution.

While an increasing number of private equity firms are improving their data solutions to address these challenges, they are discovering they can no longer just rely on simple databases, Excel spreadsheets, and largely labour-intensive processes. Cloud-based technology platforms that can support the massive amounts of data and the increasingly complex deal ecosystem can be a true differentiator and provide a competitive advantage in the marketplace.

Standardisation and transparency need better visibility

The increased interest in investments with purpose has created a challenge for managers to ensure policies are more transparent, applicable, and measurable in an area where standardised data and KPIs are still evolving. According to EY’s Alternative Fund survey, 63% of surveyed private equity managers established a corporate social responsibility governance structure to coordinate ESG activities across the organisation, and 59% embedded ESG risks and considerations into their investment decision making.

The demand from institutional investors toward public-company ESG standards is also having a knock-on effect in the private markets. As reporting requirements are standardised, private equity firms are driving their companies to adopt and develop similar solutions that measure ESG risk. And in some cases, they are using increased investor advocacy to drive that change. Support for social and environmental proposals at the shareholder meetings of U.S. companies rose to 32% in 2021 from 27% in 2020 and from 21% in 2017, according to the Sustainable Investments Institute.

How the cloud prevents data from feeling foggy

Simply put, to be good at ESG investing, you need an exceptional ESG tracking system. The increasing complexity of ESG criterion continues to put a strain on PE resources leading to a growing need to automate and simplify labour intensive processes. Technology is playing a critical role in the improvement and management of ESG mandates. Going forward it will also be a critical differentiator, providing PE firms with a competitive advantage.

Systematically tracking across portfolios as private equity builds their ESG governance, capabilities, and monitoring models has resulted in the proliferation of a massive amount of data. Cloud based technology is the solution for building these governance and risk monitoring processes and procedures as well as for providing investors with the transparency they require.

Achieving and maintaining a competitive advantage requires access to robust data and processes and the most up-to-date and customizable software platforms: all of which are available with the incredible power of the cloud. The cloud provides key functionality in these solutions, such as the speed and ability to execute on existing or overhauled governance structures, customizable configurations to track KPIs, and the ability to scale up (and down) to manage massive amounts of data.

One such example is Women’s World Banking Asset Management (WAM), the investment arm of Women’s World Banking, an organisation that makes direct equity investments in financial institutions with an explicit focus on women. As WAM’s team size and funds continued to increase, so did the volume of outreach and velocity of conversations, becoming highly complex to manage. This drove WAM to seek a software solution that allows for the centralization of data and real-time updates to ensure their pipeline and portfolio are managed efficiently, metrics are captured and analysed, and partners receive effective and timely communications.

Are you ahead of the pack or fighting off strong headwinds?

Increased stories of social injustice and growing geopolitical concerns, as well as an increasing number of climate related disasters will keep ESG top of mind for investors at all levels. GPs know it makes good business sense and many want to do the right thing. But they face the challenge of increasing complexity in tracking, monitoring, and reporting on ESG investments simultaneously with intensified competition for quality deals.

Cloud-based technology gives private equity firms the flexibility, speed, and power to build value, regardless of the geographic scope, industry sector, or operating model. It elegantly provides the ability to match the design to the investment objectives and the ability to visualise and consume information quickly. Digital disruption and transformation are happening in every industry, and, in order to make informed and better investment decisions, private equity firms are investing in the relevant data and technology infrastructure. These organisations are asking themselves: Do we think we have an edge on our competitors, or do we find ourselves lagging behind?

Ben Harrison is president of Financial Services at Intapp and the founder of DealCloud