Organizations with multiple business subsidiaries and investments stand to benefit from software which pools data and provides its users with a broad view on risk.
There's no doubt that sustainable investing has seen a substantial increase lately. Articles such as Bloomberg's 'ESG by the Numbers: Sustainable Investing Set Records in 2021' 1 make it evident that there are serious monetary inflows to this sector, a trend which has made the financial industry sit up and take note.
IsoMetrix ESG expert Jyotika Daya previously wrote on this blog about the concept of ESG investing, and the benefits to investors of having access to information on a company’s performance in terms of non-financial topics.
In her article titled ‘ESG: An investor's perspective’, she writes:
‘Investors are seeing the link between access to ESG disclosures to give context to a company’s performance, and its potential future trajectory. Risks are easily identifiable through the ESG lens which provides a broader view than a pure focus on financial disclosures, in-turn allowing for more informed decision-making.’
It’s perhaps the combination of the utilitarian (more informed decision-making) and the moral (reduced impact on the environment) aspects which holds appeal to investors, and explains the recent substantial cash inflows to this sector.
Private equity (PE) and venture capital (VC) firms looking to maximize these two components need to ensure that they are able to collect the relevant ESG data from their company investments at the required frequency.
Getting an informed picture of each organization’s ESG performance within the portfolio can be a challenge however, particularly as there is currently no legislative or regulatory mandate for private companies to track and report on their own ESG performance.
For PE and VC companies, frustration often abounds. ESG data may not be available, or is often siloed and difficult to access, leading to a lack of transparency and visibility, and making it hard for investment companies to properly gauge how their portfolio is performing when it comes to sustainability.
Given the ‘broader lens’ afforded by ESG information, there is also the potential to be blindsided by strategic and operational risks or weaknesses not usually revealed by purely financial disclosures.
Holding or ‘umbrella’ companies find themselves in a similar position regarding their subsidiary businesses. In all three cases, significant financial investment exists, making gathering relevant and timely ESG data from subsidiaries and investments a crucial task.
Private equity firms, venture capital, and holding companies will not want their investments and subsidiaries to face any type of prejudice or exclusion based on ESG non-reporting either.
ESG measures and reporting are rapidly becoming a new normal in the modern business environment, driven by a combination of public sentiment, and industry and government legislation.
As a growing number of companies begin to track and report on their ESG metrics, they will increasingly require their supply chain partners to do the same.
A good example of this can be seen with the recent US SEC proposal relating to Scope 3 emissions. Should public companies need to report on the indirect emissions that occur in their value chain, it’s quite possible that they may restrict themselves to dealing only with suppliers who also track their emissions, and who can provide accurate and reliable feedback in this regard.
A final consideration extends towards the potential sale of any companies within a PE, VC, or holding company’s portfolio. Any buyer will want to maximize the amount of information available to them in order to evaluate a potential purchase as thoroughly as possible.
Jyotika Daya alludes to this in another article titled ‘ESG risks: operational and investor perspectives’.
She writes: ‘A more comprehensive picture can be viewed through the lens of ESG, in that this data provides the color and context to the financial disclosures of a company and an indication of how well a company is doing in the greater scheme. e.g. How often do they come under fire for poor employment practices or pollution scandals?’
‘These are clear indications of the longevity and sustainability of a business – not just in terms of environmental long-term effects, but also regarding innovation, the availability of resources, and the sustainability of the long-term market for its products and/or services.’
She further quotes research from the Capital Group ESG Global Study for 2021 where 'only 28% of investors felt that financial performance was not directly improved by ESG factors', a clear indication of the importance that ESG disclosures hold for decision-making beyond the financial.
ESG management and reporting software enables private equity firms, venture capital organizations, and holding companies to efficiently gather relevant ESG information from subsidiary firms and investments, and have it all easily accessible to track, manage, and report upon.
It provides instantaneous combined portfolio ESG overviews, and fulfills increasing ESG requirements concerning legislation and strengthening public sentiment.
Learn about IsoMetrix’s state-of-the-art environmental, social and governance (ESG) application, built on an all-new SaaS platform named IsoMetrix Lumina, and discover more about our ESG software for the financial industry.
The product supports the collection of key data necessary to report ESG metrics efficiently, accurately, and in alignment with relevant standards and frameworks, as well as to manage actions to improve overall organizational ESG performance.