Mel Sutton founder of both Argyll & Buchanan and HedgeSync, a discovery tool for institutional investors who are allocating to alternative funds, has launched a new service called environmental social and governance (ESG) Check.
The newly launched ESGCheck.org is creating a database of service providers that have submitted their ESG policies and reports to its secure data room and will be made available to subscribed financial institutions.
This information will allow institutional investors and other financial institutions to make informed decisions when selecting and reviewing service providers.
Many institutional investors carry out comprehensive ESG screening on portfolio companies before investing. ESGCheck.org explains the supply chain of a portfolio company is not always transparent, especially from the outside looking in, but with an increase in outsourcing and offshoring and the opportunity to cut corners, it's a key area of focus for any ESG analyst.
ESG integration should apply to all activities, not just portfolio activity, suggests ESGCheck.org.
The supply chain including prime brokers, custodians, fund administrators, technology partners, auditors and legal, should not only be screened for ESG reputational risk but because it is integral to the core operation.
According to ESGCheck.org, the supply chain is “integral to an institutional investor’s core operations”, and so it should be transparent and ‘pass’ the ESG screening that an institutional investor would apply to a portfolio company.
Experts believe there is growing pressure from institutional investors, regulators, consumers, employees, and pension members, to provide a link between financial performance and ESG factors.
Last month, the UN released the results of the largest ever climate change survey (results span 50 countries covering 56 per cent of the world's population). The results showed that over 64 per cent of respondents believe climate change is a global emergency, despite the ongoing COVID-19 pandemic.
However, ESGCheck.org highlights that ‘E’ is just one part of the initialism. There are also increasingly high levels of engagement across the S & G factors too.
“This all trickles up to the institutional investor who is ultimately managing money for the population either directly or indirectly via a corporate client. Today, it is a prerequisite for any large institutional investor to be able to translate those ESG requirements and integrate them into a profitable portfolio. I think the regulator will do more rather than less in the near future,” Sutton comments.
Meanwhile, preparations for private equity firms to pass an ESG screening as part of their vetting process is already underway.
ESGCheck.org explains private equity managers tend to be investing for longer periods, typically three to five years.
“Are there many companies with a low ESG score (unless it's an ESG turnaround scenario) that you would invest and hold until 2024 or 2026? As per the survey, the real stakeholders (consumers, employees, pension members, you and me) are actively walking away from such companies and it tends to be vocal, there is a reputational risk for those that get involved. Yes, I do think ESG screening will be required but not just to appease investors' expectations but because it makes sense from a performance perspective,” says Sutton.
