Vidrio survey: ESG integration has yet to include compensation

Vidrio Financial, in collaboration with Close Group Consulting, has presented a paper on what it calls the “path forward” in the implementation of meaningful environmental, social, and governance practices into the portfolios and the compensation policies of investment funds and institutions.

Vidrio is a technology enabled service for allocators, offering data aggregation, analytics, and applications. Close Group Consulting is a boutique advisory firm.

This survey of investors and managers was conducted across two weeks in mid-October and, as the paper says, the survey has helped pinpoint some of the discrepancies in the alternatives and private markets industry.

One specific question in the survey gives a tight focus to the paper. The question is: “Do you consider ESG performance/metrics as part of your compensation plans?” This emphasis on compensation systems distinguishes Vidrio’s exposition from that of, say, Backstop’s survey of allocators, which looked into the degree to which allocators track ESG on their private portfolios. 

The Vidrio/Close Group survey found that none of its survey participants considered ESG a formal metric for compensation. None of the participants even said that they are “not currently” but are “planning to” introduce an ESG impact on compensation. One hundred percent answered the question simply “No.”

This finding, the paper says, “was somewhat surprising in nature given the large amount of information we hear from both allocators and managers on the importance of ESG.”

The Vidrio/Close Group survey also asked, “What do you think is the primary roadblock to your ability to successfully integrate ESG investment practices?”

Consistent with Backstop’s results, the Vidrio/Close Group survey found that the most common answer was the challenge posed by ESG data in comparability, reliability, etc.

On the further question of whether ESG is a key investment factor in line with financial factors, investors were all over the map.

Close to 31% of respondents said “no,” it is not such a factor; 23% said yes; and another 23% said that though ESG is a key part of their investment process it has a lower weight than financial factors. Another 23% agreed that ESG is a key factor but said that its significance depends on the specific strategy or investment at hand.

The same sharp split shows up on the matter of ESG data management. Vidrio/Close Group asked whether the respondents used third party ESG data providers. More than 38% said that they do not. Among those who do, some (15.38%) hedge that bet by developing internal ratings. About equal percentages (28% in each case) use a single third-party provider or use multiple providers. 

Christopher Faille

Christopher Faille has written on a variety of legal, regulatory, and financial issues for decades. He is the author of "The Decline and Fall of the Supreme Court" (1995), for example, and the coauthor, with David O'Connor, of "Basic Economic Principles" (2000). He was an early reporter with Lipper HedgeWorld and has contributed to Forbes and to the Hedge Fund Law Report.

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