How to Embrace a Data-Driven Shift Toward ESG

If you weren’t able to make it to our spring investor summit, which was held March 16-17, 2021, or you missed some of the sessions, you can catch up here by reading about the most critical takeaways.

  • Data and transparency were the two words that came up the most often throughout our event. Whether it’s about regulatory changes that affect how companies disclose political donations and climate change risks or efforts to get private equity firms and their portfolio companies to disclose more diversity and inclusion metrics, having more data will allow investors to make better decisions and put more focus on the “S” in ESG. Creating that data-rich world starts with everyone: Investors should do their part to both demand and provide more data on diversity and inclusion and other ESG metrics so that they can lead by example. “We need this ESG and DEI data to be out there,” said Afsaneh Beschloss, chief executive officer of RockCreek, during our opening fireside chat. Do your part to put it out there and thereby encourage others to do the same.
  • Don’t be a perfectionist. While data is important, summit participants recognized that social metrics are still evolving and can mean different things to different investors. Don’t let that stop you from using the data that’s already out there to help companies become better corporate citizens. “We cannot let the perfect be the enemy of the good,” said José E. Feliciano, Clearlake Capital Group co-founder and managing partner. Later in our summit, Insight Partners Managing Director Deven Parekh gave a real-world example of how to do this. Parekh shared that at a recent board meeting with one of his firm’s portfolio companies, he asked why the company was tracking data on staff turnover but not diversity. Management explained that they weren’t sure if they were tracking diversity correctly. “I won’t worry about whether you’re tracking it correctly, just start reporting it and we’ll improve the reporting over time,” Parekh told them. He advised summit participants that “what you measure, you impact. What you don’t measure, you don’t impact.” As with all ESG metrics, you have to start somewhere and then improve over time.
  • The investment industry must take a leadership role so that we can figure out how to find the most useful social metrics and then gather and share them in standardized taxonomies that enable meaningful comparisons. Regulators can help push the industry in the right direction, but ultimately investors must take the lead in creating data collection standards that will enable them to better incorporate ESG factors into their investment analysis. In the European Union, for example, regulators’ focus on ESG metrics has prompted more investors to take them seriously, explained Geraldine Leegwater, chief of investment management at Dutch pension investor PGGM. “Certainly the regulation will help and will force us further into a direction, but I also do believe that it should be from the industry itself,” she said.
  • Regulators shouldn’t stand in the way. As more investors adopt ESG frameworks in their analyses, regulators should at the very least not obstruct them. But last year, we saw the U.S. Department of Labor implement a rule that effectively eschewed ESG factors from plan fiduciaries’ investment analyses by making investment return the sole factor on which they should focus allocation decisions. In March, the department announced that it would not enforce the rule, but that doesn’t go far enough. To prevent the rule from having a chilling effect, RFK Human Rights has urged the administration to repeal it altogether. Illinois State Treasurer Michael Frerichs explained what’s at stake for fiduciaries like his state’s public funds and public pension funds: “It’s kind of like playing poker but not being able to see three of your cards, the E, the S, and the G. There are risks under those cards. If you can’t see them, how can you make a good determination?”
  • Similarly, investors must keep up the pressure on companies to follow through with the promises they made to promote racial equity and inclusion in the wake of last year’s protests over the killing of George Floyd and Breonna Taylor. If investors stop asking about diversity and inclusion, that will lessen the imperative for companies to act on those promises and make it harder to change the status quo. Ursula Burns, senior advisor at Teneo and former chair and CEO of the Xerox Corporation, urged investors to keep their focus on issues of racial equity: “One of the most important things that we can do is not take the pressure off … meaning keep asking the questions, keep pushing,” she said. “We have to keep sounding the alarm.”
  • And finally, embrace change. As trying and difficult as it has been, one silver lining of the COVID-19 pandemic has been its ability to accelerate technological change and move certain industries to adopt best practices that they otherwise might have been slow to embrace. One of the best examples of this is the shift to telemedicine in the health care sector. Regulatory changes by the Department of Health and Human Services made it easier for doctors to meet their patients virtually without running afoul of Medicare and Medicaid reimbursement rules. That will make it easier for more people to access quality care, especially in rural areas that lack doctors. And in the software space, investors saw five to 10 years’ worth of e-commerce adoption happen in the span of a few quarters as companies invested in online retail to meet consumers’ rising demand for shopping and working from home. The challenge going forward will be for all of us to capitalize on these changes to build a better and more equitable world.