Less than 20% of the GPs surveyed track GHG emissions for the majority of their portfolio companies. Even more concerning? Twenty-two percent of GPs report that they don’t track GHG emissions at their portfolio companies at all. Oof. 

We also asked GPs how they were incorporating ESG into their due diligence. Nearly 90% report that they are working this into some part of their due diligence process either at screening, closing, or throughout all stages. However, only about two-thirds of managers had some sort of formal ESG training for their teams, so we will have to assume that their use of consultants makes up the difference.

Novata represents an effort to determine what data is relevant, collect it in standardized formats, benchmark and report on it. The company aims to work with both limited and general partners to develop that framework with the goal of enabling industry participants to make better decisions around ESG risk management. Importantly, however, Novata will drive that information flow rather than rely on industry participants to name their thousands of favorite, and different, metrics. Right now, the ESG landscape is the proverbial Tower of Babel. 

None of this starts to get better until we’re at least speaking the same language. 

Ok, Hamilton Lane, you’re throwing a lot of stats and data our way. But what does this all mean? 

Very little.  

At this stage, we have no doubt that ESG questions are gating items in some RFP processes. The data trends seem to support that theory. However, only time will tell whether the industry evolves beyond asking the questions to actually making allocation decisions based on the depth of the responses and the activities they describe. 

We take a few jabs at general partners throughout these overviews (it’s ok, they’ve got thick skin) and, to show we play fair, we’ll now take a shot at limited partners on the ESG topic. From our perspective, all of the talk of ESG amounts to just that – a lot of talk and very little action. Quick, name a limited partner that chose one general partner over another because of an ESG issue. No, you can’t use one that isn’t doing “dirty energy” funds. That’s just an easy one that makes everyone feel ESG proud. Call a limited partner that loudly proclaims that they are PRI signatories and ask them what that means. Play some music to fill the awkward silence. 

The dirty little secret is that limited partners have found that asking a bunch of ESG questions makes them feel better and makes it a general partner’s problem to provide the requested information. How easy is that? It is ESG-washing, if that’s a term. (Even if it’s not, this is our overview, so we can make up our own words.) 

What we’re ultimately talking about here is a pretty sizable dilemma facing our asset class when it comes to ESG integration and management. There’s a lot out there that could be tracked and measured as it relates to ESG. There are a lot of different questions that LPs could ask of their GPs around their ESG activities and a lot of different ways they could ask for those activities to be reported. If it sounds messy, that’s because it is. Right now, there are no standards for either the data collected or what’s done with it. Everyone has their own set of fields and formats. Investors, regulators, politicians, it’s a free-for-all. At some point, standardization and a coherent framework will be necessary to allow for meaningful analysis and comparability. 

Then, we can start making performance assessments that apply some attribution analysis to ESG standards and allow for investment decision making. 

Remember, we are talking about an asset class that struggles to do this with regular performance data. Do we really think we’ll be able to do that with the added filter of whatever ESG components we select? 

At this point, we feel we have no choice but to give ourselves another pat on the back. Addressing ESG tracking, analysis and reporting issues will require dedicated effort and, we believe, a consortium of different organizations with relevant and complementary skill sets coming together to solve for these issues. Hamilton Lane has partnered with the Ford Foundation, S&P Global and Omidyar Network, along with a skilled management team, to form a company, Novata, to begin to do just that. 

For starters, no one strategy is close to achieving a perfect score of 5 consistently. Venture capital has had the lowest ESG ratings from our proprietary ESG risk assessment relative to other equity and credit strategies. We’d say that puts them squarely in the “room for improvement” bucket. Another takeaway? Bigger does not necessarily mean better when it comes to ESG risk mitigation. In fact, mid-market buyout outperforms large buyout managers, and the dispersion between success for SMID managers on ESG risk mitigation and large buyout players is very small, a 0.3 difference in total. 

We’ll turn once again to our GP survey results to consider a few other interesting data points.

In what will shock no one, investors in Europe and Australia were quicker to adopt ESG-related filters than those elsewhere in the world. While those regions have consistently been at the forefront of the discussion, their leadership position may be in question over the coming years. What do we mean exactly? Well, if North America continues on pace, with a CAGR of 49% since 2019, interest levels will narrowly surpass Western Europe and Australia in 2022. (We’ll be watching.) 

Our data tracking doesn’t end with RFPs though. Here’s a Hamilton Lane fun fact: Every manager that we invest in receives an ESG rating at the time of investment. This allows us to not only track the progress of specific managers, but also to spot macro ESG trend lines across the market. And what do we see?

The chart above illustrates that the proportion of RFPs containing ESG questions grew nearly 2x in less than two years. What’s more, the average number of ESG questions per RFP increased by more than 3x. We should note, however, that more than 50% of the RFPs in our sample contained no ESG questions whatsoever. Zilch. (That’s a less encouraging sign for anyone hoping broad ESG adoption in the private markets is just around the corner.) 

We took a look at the figures broken down by region, which illustrates some notable differences.