Since 2017, the number of private capital funds closed that integrate ESG standards into their investment process has surpassed 1,000, netting over $1tn in assets under management, Preqin data shows. But integrating ESG factors at the portfolio company level – not just at the firm or fund level – can be daunting. That’s because the alternatives industry has yet to adopt uniform ESG standards, and questions remain over how much transparency different types of investors expect.
For an expert’s view on setting ESG standards, we spoke to Jeff Cohen, Director of Capital Markets Integration and Head of Private Investment Initiatives at the Sustainability Accounting Standards Board (SASB). The San Francisco-based institution offers guidance on industry-specific standards to help public and private companies communicate their sustainability efforts to investors.
How has SASB’s mission evolved since its inception?
SASB was founded in 2011 as an independent, not-for-profit, standard-setting organization.
While SASB’s origins come from a focus on facilitating consistent comparable disclosure by US-based listed companies, the relevance of the standards matter whether you’re a publicly listed company or a privately held company. Standards needs to be cost-effective for companies to collect in order to permeate the market. This is particularly true in private markets, as many closely held companies are much earlier in their maturity, and may lack the internal controls or infrastructure to collect information and report it.
What was the rationale for broadening out the scope of SASB’s mission?
When we were developing the standards, we saw a growing mix of users – there were asset owners investing in both public and private markets, as well as GPs that were beginning to consider building ESG capabilities informed by frameworks and standards. Geographically, issuers and investors outside the US were looking to communicate ESG factors, while US issuers at times mentioned internal resistance to including ESG information in their regulated investment filings as the specific channel for distribution. That led us to develop a more global strategy focused to drive broad use and adoption of SASB standards, given the relevance of industry specificity and financial materiality underpinning the SASB standards.
What are the requirements to become a SASB member?
SASB does not certify or assess GPs or other organizations seeking to work with us. Those choosing to use SASB standards in their investment process can become SASB Alliance members or license use of the standards. These organizations support the need for standardization of how ESG information is communicated to investors, and believe that information should be conveyed in a way that is industry specific and financially material.
For those that want to have closer ties to SASB or want to get the rights to integrate SASB’s intellectual property into their investment methodology, SASB offers licensing rights as part of Alliance membership, where we provide members with integration resources, educational materials, and community benefits.
What are some key trends that are shaping how private markets approach ESG?
There is increasing harmonization in the ESG ecosystem with efforts to make ESG information more user-friendly. There has been a proliferation of organizations in the space ranging from standards, initiatives, and frameworks to principles. We know that, for GPs, having comparables is essential for the integration of ESG into analysis, and SASB works with other parts of the ecosystem as well as market participants like Preqin to facilitate transparency and consistency of useful data to help make ESG integration as seamless as possible.
Many alternatives fund managers are still getting to grips with ESG. What are some of the key benefits of ESG integration that they should know?
If you think about ESG holistically, it’s a value driver – not just for portfolio companies’ operational performance, but for other activities within the fund as well. For a GP thinking about its investors, it’s not only about facilitating continued investment from existing LPs, but also about diversifying the LP base, particularly if pursuing investment in geographies where ESG integration is viewed as a core competency.
If a GP is able to successfully facilitate, through its investment, value-driving or protecting ESG considerations into a portfolio company’s 100-day action plan post-investment, and data is collected using SASB standards, then a GP can provide LPs with robust reporting, which can be repurposed in fundraising materials to credibly demonstrate a GP’s ESG integration capabilities to existing and prospective LPs.
What key takeaways do you have for private companies wanting to share ESG information?
Don’t let perfect be the enemy of the good. SASB has an average 5-6 disclosure topics and 10-13 accounting metrics per industry. If some of them are not relevant to the operating context of the company, or if it’s too difficult or costly to collect that information, just report what you can. Report on areas where you are able to collect information in a meaningful, auditable, and cost-effective way.
It will be beneficial to your investors and to company management to begin thinking about an ESG trajectory as it can affect the company’s financial resilience.