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Three Things We’ve Learned Working
with Impact Investors on ESG Reporting

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By market size alone, impact investing might be far smaller than ESG investing, but its unique profile makes it a critical part of sustainable finance. Its obligation to actively “do good” and contribute towards a positive net change in the communities it engages, rather than concern itself purely with risk mitigation, means that the pursuit of ESG isn’t left to the machinations of pure capitalism. In fact, its unique “do active good” mandate serves as an important “best practices” guide when it comes to ESG reporting and measurement in general. This is because we’ve learned that impact investors can optimize their ESG data using the three major methods below:

Three ways to optimize ESG data

- Gaining insight from historical data

Impact investors commonly sit on a wealth of data, spanning years if not decades. By taking this data, cleaning it, and analyzing it, ESGTree helps its impact clients glean longitudinal insights on the overall performance of portfolio companies over a span of time. Using cloud-based tech and advanced data analytic tools, we provide time series and real-time analysis of ESG data, along with relevant filters for benchmarking purposes (something that cannot be achieved outside the cloud).

Historical ESG data may show incremental improvements on a yearly basis, but taken as part of a bigger – or longer – picture, these accumulated improvements could signify big change and meaningful long-term trends. In addition to making a case for how consistently a portfolio company has cut its carbon footprint, or empowered minority workers, or stayed ahead of legislation, these long-term trends can inform future ESG strategy.

- Correctly attributing ESG data

Given their unique position to “do active good,” impact investors want to know how their involvement with portfolio companies directly results in their ESG outcomes. In other words, they ask: to what extent can our efforts be attributed to the improved ESG data of our portfolio companies?

If, for example, an impact investment fund acquires 10 new portfolio companies that happen to heavily employ women in management positions, the increased “S” value of the overall portfolio cannot be correctly attributed to the fund’s input. By attributing the data correctly, rather than claiming a company’s achievements as automatically their own, impact investors track how their investments actively bring about change over time. This brings two big benefits: a) a fund is shielded from ESG failures that cannot be attributed to it, and b) their correctly attributed, data-backed achievements are a valuable tool in the fundraising process.

- Benchmarking your data

In order for impact investors to make reasonable claims about their contributions to ESG, they need to be able to assess a portfolio company’s progress in relation to other comparable companies in the region. Parsing data in relation to region, industry, company size and other relevant factors, and following these figures over time, allows investors to track progress against local and international standards and measurements.

Benchmarking is also a useful way to stay ahead of ESG regulations. By now, it is accepted knowledge that ESG ratings are suboptimal. In 2022, we sit on the cusp of new regulation and processes for standardizing disclosures. Already, frameworks such as the Task Force on Climate-related Financial Disclosures (TCFD) and the EU’s Sustainable Finance Disclosure Regulation (SFDR) have set this important and inevitable process in motion. Closer to home, the United States Securities and Exchange Commission (SEC) has also acknowledged the shortcomings of current ESG rating methods and is looking into criteria to properly define a “green” financial product. For data to mean something, it cannot exist in a vacuum.

What these three lessons on impact measurement and reporting hold in common is the idea of storytelling. What story is my data telling me? And now can I read this story properly? To do this, impact investors must use historical data to reveal long-term ESG insights, attribute the relevant ESG gains to their efforts, and assess their ESG standing as part of a bigger regional and industry-wide picture. Using these three measurement methods, private equity and venture capital impact investors will get the most out of their data.

ESG regulations

Benchmarking is also a useful way to stay ahead of ESG regulations. By now, it is accepted knowledge that ESG ratings are suboptimal. In 2022, we sit on the cusp of new regulation and processes for standardizing disclosures. Already, frameworks such as the Task Force on Climate-related Financial Disclosures (TCFD) and the EU’s Sustainable Finance Disclosure Regulation (SFDR) have set this important and inevitable process in motion. Closer to home, the United States Securities and Exchange Commission (SEC) has also acknowledged the shortcomings of current ESG rating methods and is looking into criteria to properly define a “green” financial product. For data to mean something, it cannot exist in a vacuum.

Data that tells a story

What these three lessons on impact measurement and reporting hold in common is the idea of storytelling. What story is my data telling me? And now can I read this story properly? To do this, impact investors must use historical data to reveal long-term ESG insights, attribute the relevant ESG gains to their efforts, and assess their ESG standing as part of a bigger regional and industry-wide picture. Using these three measurement methods, private equity and venture capital impact investors will get the most out of their ESG data management.

ESGTree provides one of the most advanced ESG data platforms specifically geared to private equity (PE) and venture capital (VS) investors. Our team collectively brings a wealth of experience in sustainability management, ESG management and tech.

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Summary

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What makes private equity unique?

How can historical data be used by impact investors?

What are the benefits of attribution of ESG data?

What is the benefit of benchmarking ESG data ?

Accelerate ESG reporting for investors, while
creating value for portfolio companies.