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PE Panorama: Data provider jumps into ESG measurement morass

By Paul Mackintosh   
October 8, 2019

Preqin, the private equity world’s most respected data provider, has just announced its new environmental, social and governance (ESG) indicators, which it describes as an assessment of private capital funds and investors’ portfolios based on ESG factors. I’m not convinced, and with good reason, I reckon.

Fresh from an impact investing summit in Baku attended by the pick of officials, including from the United Nations, Organisation for Economic Cooperation and Development, European Bank for Reconstruction and Development, and the whole gamut of investors from pension funds to leading asset managers, I can tell you that, with the best will in the world and immense resources, these core players are still struggling to achieve sufficient standardisation and consistency of environmental and social impact measurement for sustainable investing.

If there isn’t a common language of responsible investing for public markets, how on earth could anyone expect Preqin to develop one for private capital markets”?

The sooner any such thing does come along, the better. Yet investors are still waiting for this to evolve in the public sphere – which still dwarfs alternative investments – and to drive the real consolidation and institutionalisation of responsible investing that alone can deliver major targets such as the UN’s Sustainable Development Goals (SDG) or the Paris Agreement to limit global warming to below 2 degrees Celsius.

Yes, there are many laudable initiatives in that direction, but the critical standardisation and common yardsticks are still visibly lacking. Preqin does cite “widely accepted frameworks”, including the Sustainability Accounting Standards Board’s factors and the SDG Index. Those are probably some of the better ones available. Still, does this mean that ESG measurement for the private capital sector is now a done deal? Forgive my scepticism.

Let’s just take a slight diversion for one moment into the issue of governance. Obviously this is regarded as important enough to the whole proposition to contribute the “G” in ESG. Yet private equity has a pretty patchy record, to put it mildly, in that respect. How come so many firms are still not signed up to the Institutional Limited Partners Association’s 2015 initiative for lower, more transparent fees and costs? And isn’t the structure of private equity, which prides itself on taking companies out of the scrutiny of the public markets, fundamentally disposed to facilitate more opaque, less accountable governance?

Perhaps Preqin does deserve praise and encouragement for trying to mainstream ESG measurement in private markets. I’m a lot less ready to buy into its rhetoric on the subject, though. As far as I’m concerned, private equity firms still need to be held to account to objective standards in ESG, not those floated by a data provider intimately bound up with the industry ecosystem it purports to measure.