Introduction
To support investors in extending or adapting existing policies, programs or practices to the system-level, TIIP developed seven hypothetical scenarios. These scenarios illustrate the nature of these transitions through such things as the re-thinking of purpose, the expansion of their risk management techniques, and the use of tools designed explicitly for system-level influence.
To illustrate these transitions, we chose three different systemic challenges:
- Climate change
- Income inequality
- Availability of sustainability data
Each scenario focuses on an investor from a different silo of the investment world:
- Pensions
- Diversified financials
- Foundations
- Family offices
- Insurance
- Private equity
Each scenario describes the investor and their current status relative to conventional or sustainable investment; the catalytic moment that prompts a decision to change; the challenges in moving forward specific to their institution; their preparation for overcoming those obstacles; the actions they take to do so; and long-term management considerations necessary once that transition to system-level investment has been made.
The purpose of these scenarios is to illustrate seven of the fundamental types of transitions that will arise no matter the type of system challenge or investor. The scenarios assume investors starting from an initial minimal commitment to ESG integration and then portray obstacles that typically stand in the way of a transition to integration of an explicitly systemic approach and steps typically useful in that transition. They are stories about turning points in the journey to fulfilling the full promise of investment: to benefit society as well as the individual. Our hope is that these scenarios help investors today as they address the twists and turns on the road to realizing that potential.
How a Private Equity Firm Transitions to the System-level
Case Overview: A Private Equity Firm Collaborates to Standardize Impact Data
A fund of fund private equity firm with a social and environmental focus tackles the challenge of standardizing impact data collection across the private equity industry.
Key Takeaways
- PQR, a $300 million fund-of-funds private equity firm with a social and environmental mission, gathers data on the social and environmental impacts of the funds in which it invests. Because each fund has its own idiosyncratic methods of impact reporting, data-gathering is laborious and expensive both for the funds and for PQR.
- PQR has a strong interest in the development of an industrywide private equity standard for impact reporting. Private equity as an asset class has generally lagged others in integration of ESG into its practice.
- To solve this challenge, PQR decides to promote a collective industry data-gathering system. This involves:
- Allocating an in-house staff member entirely to gathering and analyzing impact data;
- Joining working groups on the integration of social and environmental principles into private equity management;
- Commissioning academic research on how impact reporting might best be tailored to private equity;
- Joining with peers to launch an annual award for the best reporting by a private equity fund; and
- Initiating the creation of a publicly-available database that would allow private equity firms to self-report on a standard set of impact metrics.
Case Detail
PQR is a $300 million fund-of-funds private equity firm with a social and environmental mission. It uses a fund-of-funds model, investing in a wide range of private equity funds that seek this type of impact.
As part of its due diligence for potential investments, PQR gathers data on the social and environmental impacts of the funds in which it invests. Because each fund has its own idiosyncratic methods of impact reporting, PQR devised a standard questionnaire to obtain comparable data. Given the extensive number of funds PQR considers and the need to keep current on those in which it has invested, data-gathering is laborious and expensive both for the funds and for PQR. Indeed, the funds frequently complain that completing these questionnaires is excessively demanding and a distraction from their daily operations.
Consequently, PQR has a strong interest in the development of an industrywide private equity standard for impact reporting. Private equity as an asset class has generally lagged others in integration of ESG into its practice. Only a handful of large firms have made substantial advances, although a healthy cohort of smaller impact-oriented firms is gradually emerging.
PQR staff is divided on how to manage this data gathering challenge. Some advocate continuing to expand their current proprietary database, using it to gain a competitive advantage. Others argue that their efforts would be best spent on developing an industry-wide standard that would enhance its reputation.
Still others, citing the expense of the current process, advise cutting back, gathering only a limited number of key performance indicators that can capture most, if not all, of the substantive differences among funds.
After a months-long internal debate, management decided that single-handedly creating a comprehensive impact-measurement database in an ever-expanding universe of firms would be beyond its capabilities, and that a stripped-down version of its due diligence process would not be sufficient to fulfill its mission. They opted instead to promote a collective industry datagathering system.
To do so, in addition to allocating an in-house staff member entirely to gathering and analyzing impact data, PQR joins working groups on the integration of social and environmental principles into private equity management, such as the Principles for Responsible Investment. In addition, it commissions academic research on how impact reporting might best be tailored to private equity and joins with peers to launch an annual award for the best reporting by a
private equity fund. It also proposes and then initiates the creation of a publicly-available database that would allow private equity firms to self-report on a standard set of impact metrics. In providing leadership on these initiatives, PQR hopes not only to enhance its own reputation within the industry, but also to benefit industry as a whole, improving its assessment and measurement tools and bolstering its overall reputation.
Further Reading
Steve Lydenberg, Robert Dannhauser, and William Burckart, “Graduating from ESG to Systems: Scenarios for Investors,” Money Management Institute and The Investment Integration Project, October 2020.
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