The ESG data challenge: choosing what to measure – and how

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We all know the difficulties involved in gathering and managing ESG data. But there are ways to streamline the process and improve outcomes

These days there is an abundance of Environmental, Social, and Governance (ESG) data. But quite often, the data that's available is not what portfolio companies and managers need.

While ESG professionals know this, the discrepancy continues to grow, thanks to increasing demands from regulators and investors for sophisticated reporting, often with confusing or conflicting data requirements, particularly over sustainability.

So, what ESG data should we measure? How should we measure it? Which of the many competing standards should we apply? And once we have the data, how do we manage it?

The private equity sector is grappling with all these questions in the face of new regulatory demands, just as regulators globally ramp up demands for more comprehensive ESG reporting.

At Intertrust Group, we think the first step is to simplify as much as possible the processes surrounding ESG data collection and management.

Complexity breeds confusion. Rationalise your data process by gathering only what you need, and only from sources you trust. Use technology to process it swiftly and efficiently.

The challenges of ESG data

Without this simplification, the challenges that come with ESG data can seem insurmountable.

There are scores of potential metrics to collect and measure. At the same time, data from private companies is notoriously hard to come by. One way to sidestep private companies' reluctance to provide data is to use proxy data instead - that is information gathered from similar companies in similar locations that do share their data.

However, the mood is turning against proxy data. Regulators increasingly see that it is likely to paint an inaccurate picture, as two seemingly similar companies can do things in entirely different ways.

Same data, different conclusions

This lack of consistent global standards means that identical datasets can cause businesses to struggle to know what to report and in what form.

Recently, there has been some effort to close gaps in ESG reporting between, for example, the Sustainability Standards Accounting Board (SSAB) and the Global Reporting Initiative (GRI) standards, but these are at an early stage. At the moment, the problem of divergent reporting standards is merely recognised rather than solved.

These issues filter right through the system. When it is hard to know what data to collect and what standards to apply, it is difficult to trust the insight that emerges at the other end.

That is a significant challenge for fund managers who must satisfy both regulators and investors about the accuracy of their ESG credentials. But it is essential that this challenge is met. It will be impossible to meet targets contained in the Paris Climate Agreement without a vast redistribution of private funds to sustainable initiatives. Investors need complete faith in the data on which major financial commitments are based.

At the moment, that is simply impossible in many cases. Data vendors who use the same ESG inputs often reach entirely different conclusions. As a result, scepticism surrounds ratings that brand one fund good and another bad in ESG terms.

ESG data: the case for simplification

In this challenging environment, we advocate a back-to-basics approach to data gathering and management.

Speaking on a recent Intertrust Group podcast, Marc Lino, a senior partner at consultants Bain & Company, said that to cut through this confusion the private equity sector needed a far more selective approach to ESG data gathering.

Marc advocates what he calls the "80/20 approach", which means you getting 80% of the information you need from 20% of the available metrics.

At Intertrust Group, we work with clients to identify the relevant ESG key performance indicators (KPI) for their business and what type of data management framework is most appropriate for their industry.

In a word, we rationalise. We also recognise that it is impossible to obtain perfect data, but that should not hold businesses back. Chase the data you need. Ignore any that is not relevant to your purpose.

Sourcing more accurate ESG data

The data you need is the data you can trust. At Intertrust Group, we work with our clients' portfolio companies in private markets to obtain accurate data. We understand that proxy data is not good enough on its own, so we go directly to the source.

After identifying and collecting relevant data, the final stage in the process of simplifying ESG reporting is to manage it more efficiently.

But doing so with Excel, as many fund managers still do, is hugely inefficient and time-consuming. Our own ESG solution maps the data you collect to all common reporting standards. Clients can use the same inputs for multiple outputs.

In other words, we simplify the ESG data process end-to-end, offering a managed service that is informed by expertise and driven by technology.

We focus heavily on ESG data because reporting it will only become more demanding in future. With that in mind, it is essential that the data you gather is focused and accurate, and that you manage it as efficiently as possible.

Why Intertrust Group?

• Expert guidance in how to take control of ESG data in your portfolio with 24/7 access to performance data
• Online dashboards and reports allow clients to compare the performance of portfolio companies and funds
• Our solutions allow your portfolio companies to calculate greenhouse gas emissions based on up-to-date national and local coefficients

Eager for more insights on ESG? Join our next event #PrivateFundsIndustryLIVE | ESG: Tackling the EU Taxonomy.

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