Like other operators in the financial services industry, private equity (PE) funds are under, regulatory, investor and market pressures to integrate sustainability considerations into their investment strategies.[1] In particular, limited partners (LPs) are increasingly committed to adhering to sustainability standards. In response, PE funds are looking to enhance the sustainability performance of portfolio companies during the holding period as a means of increasing value and improving risk-adjusted returns.
Assets under management by PE funds are projected to increase from $5.9 trillion U.S. as of June 2022 to $9 trillion in 2025. As such, the sustainability engagement of these funds will be critical in supporting the transition to a low-carbon economy as established by the Paris Agreement.
This PE firm serving Asia and MENA recognized the growing importance of sustainability and hired a sustainability manager to work with portfolio companies to begin to measure their performance on this front. The executive team believed that an increased focus on sustainability would enhance the valuation of companies upon exit. As a first step, the manager was asked to work with the investment team to evaluate the current situation for two companies that both had exit strategies planned for the next several years. The manager needed access to credible data and subject matter expertise to proceed.
Pain Points
The PE sector continues to be more aware of sustainability issues given growing pressures from LPs, the implications for fundraising and the impact on valuations. Being a new area of consideration for this PE firm, the sustainability manager wanted to obtain external guidance on market trends, standards and norms. In particular, he wanted to:
- Assess the sustainability performance of two specific portfolio companies.
- Benchmark their performance relative to peers in the same industry.
- Share the findings and approach with other portfolio companies.
The manager knew that S&P Global Market Intelligence (“Market Intelligence”) had many sustainability subject matter experts, plus a strong track record of working in the investment arena. He reached out to learn more about capabilities in this area.
The Solution
Specialists from Market Intelligence spoke about the growing importance of sustainability for PE firms and the work underway with similar firms. They then described two capabilities, S&P Global Private Benchmarking for PE Firms and S&P Global ESG Scores, both powered by the S&P Global Corporate Sustainability Assessment (CSA).
The CSA, first established in 1999, is an annual evaluation of companies' sustainability practices focusing on criteria that are both industry specific and financially material. It uses a consistent, rules-based methodology that includes 62 different industries. There are approximately 100 questions for each industry, with each question falling under one of approximately 23 different themes that, in turn, fall under one of the three dimensions: Environmental (E), Social (S) and Governance & Economic (G). The CSA generates a total score for every company covered, as well as individual scores for the three dimensions, with 100 being the best score in each case. With 10,000+ assessed companies annually, the CSA has become a reference tool to gauge the financial materiality of a company's sustainability performance from an investor perspective and to prepare them to address upcoming sustainability trends.
Since private companies tend to be early in their sustainability performance measurements and disclosures, S&P Global Benchmarking for PE Firms is a streamlined version of benchmarking for the needs of PE firms. CSA questions are tailored for non-listed Micro and NanoCap companies and PE needs, with a reduced number of questions covering approximately 15 different themes across the E, S and G dimensions.
Together, the two services would enable the sustainability manager and investment team to:
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Evaluate and benchmark a company's sustainability performance |
The S&P Global Private Benchmarking for PE Firms for non-listed Micro and NanoCap companies provides assessment, benchmarking and reporting services needed for all stages of a portfolio company's lifecycle, from initial due diligence to portfolio maintenance to exit. The process involves data collection and scoring, followed by benchmarking and reporting. Data collection and scoring: Portfolio companies receive access to the secure online CSA platform where they complete a questionnaire, provide supporting information and upload documents according to the chosen scope of the assessment. Once completed, S&P Global sustainability analysts review and verify the submission and compare the data provided with industry peers. Benchmarking and reporting: At a company level this includes:
At a portfolio level this includes:
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Complement benchmarking with additional sustainability intelligence |
S&P Global ESG Scores are a sophisticated measure of corporate sustainability performance designed for companies, investors and other stakeholders to address critical risks and opportunities. Detailed: Driving scores are up to 1,000 underlying data points per company to provide the granularity needed. Specific: While many ESG scores are vague and qualitative, the S&P Global ESG Scores provide numerical assessments (1-100) of corporate sustainability performance, built upon transparent layers of quantitative metrics. Thorough: Companies are monitored on a daily basis through Media & Stakeholder Analysis (MSA). The scanning of sources makes users aware of any potential involvement a company may have in material controversies that could have a damaging and lasting effect on their reputation, financial circumstance or business model. Varied: The S&P Global ESG Scores let users capture a more extensive range of topics at a granular level than public reporting alone can provide. Approximately 17% of the core sustainability factors are either not widely reported at present, not reflected in existing industry frameworks or are factors that require more granular levels of data than generally captured via public disclosures. Material: For each industry, we prioritize sustainability factors based on their expected magnitude (degree of impact) and the likelihood of their impact (probability and timing of impact) on companies’ financial standings according to growth, profitability, capital efficiency and risk measures. Factors are additionally assessed according to their overall impact and importance to stakeholders and the natural environment to systematically generate weighting. |
Key Benefits
The sustainability manager and his investment colleagues thought that the Market Intelligence offerings would provide the data and support needed to begin their sustainability journey the right way. The firm subscribed to the Private Benchmarking service for PE Firms and S&P Global ESG Scores enabling the teams to:
- Understand the current sustainability performance of the two companies selected for evaluation based on easy-to-understand numerical scores that range from 1 to 100, with 100 being the top score.
- See how this performance compares to peer groups.
- Establish a plan for improvement over time to help enhance valuations at exit.
- Share the findings with other portfolio companies to underscore the firm's thinking on sustainability and describe appropriate methodologies for evaluating performance.
- Rely on time-tested approaches based on years of investment expertise and engagement with corporations.
- Tap into unparalleled support from a team of sustainability specialists to address any questions and stay abreast of market developments.
[1] "Sustainable private equity investing in the digital infrastructure industry”, S&P Global Market Intelligence, June 29, 2022, www.spglobal.com/marketintelligence/en/news-insights/research/sustainable-private-equity-investing-in-the-digital-infrastructure-industry.