Lack of private market transparency presents ESG challenge
The lack of transparency in private markets is making it difficult for fund managers and advisers to assess them from an ESG perspective, according to commentators.
Data from the Responsible Investment Association Australasia (RIAA) shows 99 per cent of investment managers said they implement ESG integration within their investment strategies. However, this data is harder to obtain for private markets funds which are not publicly listed and are typically more opaque with their information.
According to Preqin, 60.5 per cent of private markets assets under management is managed by a fund manager with an active ESG policy, falling to 52.8 per cent for private equity.
Estelle Parker, co-chief executive of the Responsible Investment Association of Australasia (RIAA), said: “The lack of transparency in private markets presents a challenge. The demand for clearer ESG data is growing across the board and investors are driving this change to make better, long-term decisions.
“Data providers can struggle to obtain ESG data from unlisted companies as they often tend to rely on publicly available information.”
It is not just a challenge for investors but for fund houses alike as research by State Street found 61 per cent of private market managers believe including ESG information will make their funds more attractive to the retail market. However, they identified quantifying ESG risk as a major challenge for them.
In its 2024 Private Markets Outlook Headwinds & Tailwinds report, which surveyed 500 investment institutions globally, it said both investor clients and manager parts of the market were “having trouble” assessing private market opportunities which was presenting challenges from a risk perspective.
Over a third (37 per cent) said they were experiencing challenges in both producing non-financial data, such as ESG, and obtaining it.
Over at the Transition Pathway Initiative (TPI), a global initiative to assess companies’ preparations for a low-carbon economy, chair David Russell said private markets are an area that needed improvement in this format.
He commented: “There are projects out there trying to encourage the sector to provide more information on ESG and climate information, but private companies are notoriously bad at this because they don’t have to do so. It’s definitely an area that needs to be improved.
“We would say they are being ‘encouraged’ to provide this information and there is a lot of engagement from asset owners in Australia to do this, but we can’t make them do it sadly.”
He said the TPI is actively seeking to increase its company assessments in the private sector to help investors obtain the necessary information to meet their ESG criteria.
“We need to work out a way to assess private companies and get the information out of them to be able to undertake the assessment, but we are looking into it.”
From the perspective of research houses, Dugald Higgins, head of responsible investment and sustainability at Zenith, said most ESG data was found with real estate and infrastructure funds, but it was harder to obtain for private credit which he described as a “problematic” asset class.
Money Management previously covered the concerns that research houses had around the boom in development of private credit funds and their lack of transparent data.
While Higgins expected the publication of ESG data to improve, he said it would likely be at a slower pace than the development of ESG in listed markets. As a result, it is up to the investor to adjust their due diligence to take into account the alternative methods of data collection.
“The data is there if you look for it. It has to be a tailored process, depending on the asset class. The bigger the manager, then the more likely they will have this data.
“But you can’t just use the same process as you do for public markets; you just won’t get that information. More information will become available over time, the same path we have seen public markets evolve over the last five to 10 years. It will be the same for private markets, but at a slower rate.”
Parker said the discrepancy provided investors with the opportunity to push for greater changes in the future, as well as the opportunity to engage with these firms on long-term initiatives given the long holding period for these assets.
“By pushing for greater transparency and accountability, investors can not only better manage risks but also encourage companies to adopt more sustainable practices that benefit the company long term.”
AUTHOR
Laura Dew
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