S&P Global Market Intelligence (NYSE:SPGI) has partnered with ESG data manager Novata to launch a new solution that integrates financial information with ESG insights.
- The integrated solution will offer Novata’s ESG capabilities through S&P’s existing iLEVEL software, enabling private market investors to manage both types of data in unison.
- Private markets are under increasing pressure to implement and disclose their ESG strategies, but must ensure that their decisions make sense financially.
- As the digitalisation of ESG reporting catches up with that of financial disclosure, technologies that combine the two will be in high demand.
S&P’s iLEVEL platform is a private market solution that helps investors collect, monitor, analyse, and report on conventional financial data in real-time. Under the strategic partnership agreement, it will now be integrated with Novata’s ESG capabilities.
Novata helps general partners and private companies to gather and disclose data on the ESG metrics that are most relevant to them. Its metrics library covers 10 different ESG categories, with each available measure being based on industry standards including those of the Global Reporting Initiative, the Taskforce for Climate-related Financial Disclosure and CDP.
The open architecture system is adapted over time, accommodating new standards and regulatory requirements as they emerge.
Integrating the two solutions will mean S&P’s customers can assess their financial and ESG data in unison, thereby enabling them to make informed decisions based on the connections between ESG strategies and financial outcomes.
According to Novata’s president and co-founder Scott Kennedy, “until this point, ESG data has existed in a vacuum and there hasn’t been a way to effectively connect ESG and financial data. Through this partnership clients will now be able to incorporate ESG dynamics into discount rates to better value companies.”
“Our customers want the best of both worlds: all of their important data, both financial and non-financial, in one place, as well as a solution that is tailor-made for the unique challenges of collecting ESG data within the private capital markets”, adds Andrew Eisen, head of software solutions at S&P.
“By teaming up, S&P Global Market Intelligence and Novata are able to provide our customers the trust and transparency they have been looking for to better manage risks and opportunities through an integrated solution”, he concludes.
Private companies under pressure to report on ESG
Private companies are under increasing pressure to implement and report on long-term ESG strategies, with investors, customers, employees and governments demanding greater transparency on sustainable and socially responsible practices.
This pressure is particularly important for those aiming to raise capital. With a meta-analysis of over 2,000 studies between 2015 and 2020 concluding that the implementation of ESG strategies often results in improved financial performance, particularly over longer time horizons or during crisis periods, the case for being able to highlight positive ESG initiatives becomes clear.
The importance of materiality assessments in ESG investing
Despite this research suggesting that ESG metrics can significantly impact the financial risks and opportunities of investments in private companies, the extensive range of available metrics and the variation between individual firms and the sectors they occupy means that no clear correlation can be assumed for all decisions.
To determine which investments will prove financially successful while also improving their ESG performance, ESG data must be added to traditional methods of assessing potential returns.
This can be done by conducting a materiality assessment, which allows companies to develop their strategy by determining which issues matter most from a financial perspective.
Materiality assessments in ESG investing must include double materiality, which provides insights into both the impact of ESG factors on the business and how the business affects society and the environment in return.
Bringing financial and ESG considerations together in such a way helps companies identify clear opportunities to add value to their business while becoming more sustainable, thereby providing a unified perspective of potential investment risks and opportunities. How this is communicated to stakeholders, however, remains a challenge.
Disclosure goes digital
The digitalisation of financial communications with stakeholders has been common practice for years, with the XBRL providing a globally accepted standard for the digital tagging of financial statements. These tags are implemented to improve the transparency and credibility of data by helping investors to trace information back to its origin.
As such expectations extend into the world of ESG, so too does the need for digitalisation. This need has been recognised by the International Sustainability Standards Board, which is currently developing its Sustainability Disclosure Standard for digital reporting, and by the US Securities and Exchange Council, which will prioritise digital tagging in its upcoming climate-related disclosure rules.
These developments suggest that regulators and standards-setters alike are beginning to acknowledge that stakeholders’ need for timely and accurate disclosure of both financial and ESG data can only be met through digital technologies. For as long as the two remain separate, however, stakeholders will struggle to make informed decisions.
This leads to the assumption that, as investment in ESG technologies continues to rise, platforms that can combine and simplify both datasets will be in particularly high demand.