Dynamo Software surveyed 100 GP and LP clients on ESG, DEI and their priorities in recent months, finding that a minority (18%) attributed little importance to ESG ratings.
Not quite half (45%) of respondents said that ESG ratings were either “very important” or “extremely important/essential” and another 37% said the ratings are “somewhat important.”
At first glance, the responses seem straightforward,” said Danielle Pepin, head of product, portfolio monitoring and valuation, ESG and mobile at Dynamo. “However, they start to get convoluted when looking at how respondents feel about ESG performance.”
The team found that participants were less enthusiastic about ESG investment performance. Only 45% said that ESG-focused investments perform better and 44% said the performance was the same as non-ESG investments. A small number, 11%, said ESG investments performed worse.
The metrics for evaluating performance are not uniform, Dynamo pointed out. The incorporation of ESG factors into investment decisions also lack standardization. In the survey, 38% use manual technology such as spreadsheets for measuring ESG performance — which can be a time-consuming exercise.
At Dynamo, the aim is the removal of such manual tasks, according to Dynamo CEO Hank Boughner. “Evolving resource-heavy processes continues to be underscored in our research reports as a top strategic imperative,” he added.
Net zero/carbon emissions was named as the top ESG issue that LPs and GPs are prioritizing over the next 12 months. The findings show that ESG metrics tend to be skewed toward environmental factors rather than the social and governance components.
When asked about their own firm’s ESG performance, Dynamo found that environmental factors still topped the list. Respondents ranked climate change/carbon emissions as number one, followed by energy efficiency improvements and then established business ethics.
Greenwashing remains a concern among 60% of participants. Nearly five in 10 are concerned enough to be doing something about such as regularly monitoring for deceptive practices.
Can AI play a role?
Dynamo’s Pepin views artificial intelligence (AI) as a potential “saving grace” for ESG as a way to simplify reporting, create data models and apply analytics. She added that it could even help align ESG data with the latest standards and frameworks.
More broadly, AI was viewed in the survey as being the most difficult sect to evaluate for ESG when making investment decisions.
According to PwC UK research, AI for environmental applications could contribute up to $5.2 trillion to the global economy in 2030.
Dynamo identified a disconnect between DEI as a strategic focus of ESG and budgeted priorities.
DEI was the second highest ESG-related issue they are currently prioritizing. Roughly 68% said they aren’t allocation funds to address it, but almost 30% said they see value in doing so. Many have put off further action until 2024 or when a budget for DEI initiatives becomes available.
“Our survey findings are likely a reflection of the still-nebulous nature of DEI strategy and how it ties to ROI,” Pepin said. “Many of these firms may very well be pursuing the acceleration of DEI principles, albeit without an earmarked line item in the budget. The same may be true among portfolio companies, making it difficult for LPs and GPs to evaluate the true effectiveness of DEI on performance.”