Sustainability investing is creeping into the private market as investors with changing attitudes begin to push environmental, social, and governance (ESG) issues into their private investment strategies even without the regulatory pressures existing in the public markets.
“Private asset investors are very ESG-conscious nowadays and they want to ensure capital is deployed to ESG-compliant assets,” says Serge Krancenblum, group executive chairman of investor services group IQ-EQ.
Unlike the public stock market where regulators play a pivotal role in enforcing ESG disclosure, investors take the lead in the private asset market.
“I think the pressure from the ecosystem is more substantial than the pressure from the regulator,” says Krancenblum. “Investors who are sceptical of ESG being performance-enhancing still adopt ESG investing because they understand that, in the long run, the value of non-ESG-compliant assets will decline.”
This phenomenon is first seen in the private market as Krancenblum recalls that investors put minimal attention to the subject matter two years ago.
This change of attitude is within expectation. As private equity firms look for an exit route for their investments through initial public offering, the regulatory pressure from exchanges will eventually trickle down to the private market.
Yet, one interesting trend is developing: private asset investors are gradually scrutinizing portfolio companies’ diversity and inclusion policies.
“I could have mentioned carbon emission or other environment disclosure as the most common request from investors which they are,” explains Krancenblum. “Yet, for the last month, one thing that is drawing investors’ attention is diversity and inclusion.”
One possible explanation for this is that indicators are easier and relatively simple to verify in this area. Unlike other social issues such as human rights violations, gender ratio at different levels of management positions and the corresponding remunerations ratio of a company are tangible and quantifiable.
However, even if the portfolio company looks perfect in terms of ESG disclosure as requested by investors, reputational risks remain material in this highly opaque segment of the market.
To manage the risk, IQ-EQ conducts reputational risk assessment on behalf of asset managers by deploying native analysts across the world who collect and collate intelligence from rumours, local press reports, and lawsuit records.
Currently the company service over 8,000 institutions, including private equity firms, venture capital firms, private debt investors, and family offices.