THE CUSTOMER:
A European alternative asset manager 

USERS:
The Private Markets ESG team

The concept of investing under environmental, social and governance (ESG) principles has gone mainstream, yet private markets have been slower to adopt sustainability reporting for their investments. Spurred by the European Union's Sustainable Finance Disclosure Regulation, many European alternative asset managers are now pursuing measures to improve transparency on a wide range of sustainability metrics. However, limited data, rapidly evolving regulatory frameworks, and nuanced reporting issues are creating numerous challenges as firms struggle to define what information must be captured and how best to collect it from portfolio companies.

The ESG team at this large European-based alternative asset manager was collaborating with the capital market strategies, private equity and private debt teams to assess the environmental, social and governance stance of companies the firm had invested in and was considering for the future. The team wanted to establish a new, more robust process for measuring and reporting sustainability performance across their portfolio companies, including scoring and benchmarking capabilities.

Pain Points

In Europe, regulation continues to prompt a greater focus on sustainability disclosure, yet the ESG team at this investment firm lacked a deep knowledge of industry-standard sustainability data points. The current process for sustainability due diligence was internally developed and limited to ESG data collection, where the incoming data lacked uniformity. The team wanted to create: 

• A single source of truth for pre-investment ESG data for their portfolio companies.
• A standardized format for post-investment ESG data for their portfolio companies.
• The ability to benchmark sustainability performance across investments at the individual deal or fund level.
• A sound ESG methodology to withstand increased stakeholder scrutiny and continuously evolving regulatory standards.

The team contacted S&P Global Market Intelligence (“Market Intelligence”) to discuss available capabilities.

The Solution

Specialists from Market Intelligence spoke about the growing adoption of sustainability integration practices for alternative asset managers and the importance of differentiated pre- and post-investment solutions to understand how the performance of individual portfolio companies can evolve with or without engagement. They explained that leveraging the S&P Global Corporate Sustainability Assessment (CSA) and S&P Global ESG Scores, from S&P Global Sustainable1, could deliver a way to implement and scale a new ESG scoring framework from initial data collection to portfolio reporting.

The CSA, established in 1999, is an annual evaluation of companies' sustainability practices, focusing on industry-specific and financially material criteria. It uses a consistent, rules-based methodology that includes 61 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 and Economic (G). Some criteria are common across industries, while others are industry specific. The CSA generates a total ESG score for every company covered, as well as individual scores for the three dimensions, with 100 being the best score in each case.

A streamlined version has been developed for the needs of private markets firms. Questions are tailored to non-listed Micro and Nano-cap companies and the needs of private markets, with a reduced number of questions covering approximately 15 different themes across the Environmental, Social and Governance dimensions.

Together, the CSA and ESG Scores would enable the ESG team to:

Full lifecycle analysis of a portfolio company's sustainability performance

The CSA benchmarking and reporting services provide the tools 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 a 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 Sustainable1 ESG analysts review and verify the submission and compare the data provided with industry peers. Benchmarking and reporting: At a company level, this includes absolute and relative performance indicators compared to industry peers on a Total, Dimension, Theme and Question level. At a portfolio level, this includes benchmarking and reporting across portfolio companies for internal analysis and to be shared with limited partners.

Enhanced sustainability benchmarking capabilities

S&P Global ESG Scores are a sophisticated measure of corporate sustainability performance designed for companies, investors and other stakeholders to address critical sustainability risks and opportunities. Standing apart from other ESG scores, they are produced through a unique combination of verified company disclosures, a review of potential controversies and in-depth company engagement via the CSA. The straightforward nature of the S&P Global ESG Scores help customers understand the sustainability strengths and weaknesses of companies relative to their peers to incorporate sustainability insights into portfolio management.

Key Benefits

Market Intelligence was able to provide a customized solution for the firm, along with extensive training on the solution and data access features for approximately 120 investment analysts. The firm is now benefiting from: 

• A flexible solution with the ability to customize questionnaires for portfolio companies and centralize data collection.
• Timely access to ESG Scores that are received within 48 hours of submission
• A single source of consistent ESG Scores utilizing the same methodology employed for public companies, thereby supporting benchmarking and reporting.
• The ability to consider certain sustainability risks and opportunities when investing in a company and effectively report sustainability performance to investors at the fund level.
• A plan for refinement over time to help enhance valuations at exit.
• Unparalleled support from a team of sustainability specialists to address questions and stay abreast of market developments.

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