Private companies are under pressure to disclose more data relating to their performance on environmental, social, and governance issues.
Gary Gensler, chairman of the Securities and Exchange Commission, has asked fund managers that run ESG mandates to back up their claims. That message has been transmitted from regulators to asset managers, which in turn have been squeezing their portfolio companies to release details about their ESG practices.
“Many funds these days brand themselves as ‘green,’ ‘sustainable,’ ‘low-carbon,’ and so on,” Gensler said in a speech before the European Parliament Committee on Economic and Monetary Affairs in September. “I’ve directed staff to review current practices and consider recommendations about whether fund managers should disclose the criteria and underlying data they use to market themselves as such.”
Private companies often have few public disclosure requirements, but there are creative ways to get around the black box and meet Gensler’s call for reform.
Larry Lawrence, executive director and head of ESG products for the wealth management market at MSCI ESG Research, said that public companies have been publishing ESG data in their financial reports, making it easier for investors and rating agencies to track their performance on these measures. But when it comes to alternative assets, including private equity and private debt, “there’s really little to no information,” Lawrence said.
To address the transparency gap in the private markets, MSCI constructed an ESG analytic tool to be similar to the ones it designed for the public markets. And it chose to tackle the “E” element first through a partnership with Burgiss, a data and analytics provider focused specifically on private markets and based in Hoboken, New Jersey.
Starting in October, the index provider has been tracking the carbon footprint of private assets by using market information collected by Burgiss and a model it has developed. The new analytical tool can now estimate carbon emissions for more than 15,000 private companies and nearly 4,000 active private equity and debt funds.
“The investors who power private assets — such as pension and sovereign wealth funds, endowments, and family offices —are increasingly expressing the need to know the carbon intensity of their portfolios and whether investments in unlisted assets are furthering their long-term strategies,” said Remy Briand, global head of ESG and climate at MSCI.
The pressure from third parties is working. It has pushed more private companies to voluntarily disclose their ESG data.
A recent report from Boston Consulting Group found that 61 percent of a pilot group of portfolio companies reported their greenhouse gas emissions in 2020, up from 36 percent in 2019 and only 1 percent in 2018. A group of private market asset managers and institutional investors, including Blackstone, Caryle, and the California Public Employees’ Retirement System, is letting BCG study the ESG disclosure of their portfolio companies.
“Some have raised concerns that as increased regulatory pressure and disclosure requirements affect public companies further, private equity could become a safe haven for high-polluting divestments. Yet we found that the private equity-owned companies in our sample have been generally willing to increase their quantitative GHG [greenhouse gas] emissions disclosures,” the BCG report said.
Private businesses can even act more quickly than their public counterparts when it comes to disclosing ESG data and improving portfolio companies’ ESG performance, according to the BCG report.
“Private companies are typically smaller, leaner, and less bureaucratic than their large public company counterparts,” said Vinay Shandal, managing director and partner at BCG. “A lot of these sustainability initiatives require a company to move fast. Frankly, that’s just harder to push through in a public company.”