By Joel Kranc

The movement towards Environmental, Social and Governance (ESG) integration within investing has been gaining momentum for a few years. Pension funds in Canada like CPP Investments, the Ontario Teachers’ Pension Plan Board (OTPP), and the Ontario Municipal Employees Retirement System (OMERS), some of the most active institutional investors with more than a trillion dollars in assets under management combined, have committed to net zero by 2050 across their portfolios.

From a reporting perspective, pension plans voluntarily report on total carbon emission and carbon footprint metrics at the portfolio level. This marks their first step in ESG-related disclosures. The pension plans also work with regulators and advocate for broad alignment of reporting at the company level to improve the quality, quantity, and comparability of ESG disclosures.

Even at the compensation level the majority (80 per cent) of Canadian public companies are using at least one environmental, social and governance factor in their executive compensation plans, with social factors (78 per cent) the most prevalent measure, according to a new report by WTW. A quarter (25 per cent) of Canadian companies reported plans to introduce an ESG measure or expand or modify their use of ESG measures in executive compensation plans.

It is with this backdrop that a panel gathered (How to Move the Needle on ESG Data Measurement in Private Equity) at the CAIPform Summit in Toronto late last year to discuss issues around ESG.

Catherine Isabelle is managing director, head of marketing and client retentions, Americas with ICG. She says that ESG should be considered additional information to risk in financial opportunities. The discussion as it pertains to climate change – financial risk – as it relates to physical and transition risk – are happening as we speak.

“If we ignore these considerations we are exposing ourselves to risk, and being accountable for not taking [the ESG issues] into the full spectrum of consideration when we do investments,” explains Isabelle.

Also on the panel was Kookai Chaimahawong, ESG partner with UpperStage Capital. She says: “Within private equity it’s not just looking at risk or risk assessments. We may look at companies in the stock market and see that certain companies are exposed to E, S or G, but more than a risk factor, I would see this as value creation,” she notes. “When we become an investor or majority investor in a company, we are actually able to force change. We look at companies through an ESG framework and try to assess what are the gaps we can actually manage. So as an owner, we can both manage risk and optimize value.”

For many pension funds or private equity firms, seeing companies through the prism of ESG is moving beyond data points and seeing how it is possible to really have an impact in those investments.

Isaac Olowolafe Jr., Co-founder and general partner with BKR Capital says, “When you look at climate change and workplace issues, for example, that has a direct impact on the sustainability of that company. The more data that comes out, the more the benefit can come out and be incorporated into the policies of the companies.

Data is a key element that will be necessary, and need to be improved upon in order to continue the ESG investment framework and make it better. Olowalafe Jr. adds that data, a lack of data and non-standardized information is making it slow. “From a GP point of view, how do you properly standardize those policies of data from portfolio companies and what metrics should you be using? As time goes on, we will see more standardization with those data points so it can be used to make educated decisions.”

Chaimahawong adds that data is one of the biggest challenges and the lack of standardization. “It’s not that there are a lack of standards,” she adds, “it’s because there is an overload aspect out there.”

“We need to be ambitious but we need to be realistic at the same time,” says Isabelle. “If we [look] for too many KPIs we will fail.” It’s best, she adds, to look for value-add points but we need to know where gaps need to be closed and how best to measure them.