Whether in public or private markets, investors are demanding more disclosure on companies' environmental, social and governance performance.Sumedha Lakmal/iStockPhoto / Getty Images
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As more investors look to private markets to diversify from publicly listed securities, some are seeking greater transparency on environmental, social and governance (ESG) issues in an area of investing that has typically offered less disclosure.
The growth of private market investment options has intersected with efforts to develop more stringent and uniform sustainability reporting standards on companies and asset managers within Canadian capital markets and abroad.
“This is a hot topic right now – both themes are growing,” says Bonnie Foley-Wong, who leads sustainability consulting for Mercer Canada. “We’re seeing more investors allocate to private markets; we’re seeing more investors thinking about sustainable investment. The two are happening in parallel.”
But that doesn’t mean a shift in investor capital toward more lightly regulated private assets poses a risk to ESG standardization efforts, says Deborah Debas, a senior specialist with Desjardins Wealth Management, who advises on responsible investment strategies.
“Investors require the information whether they’re going after public or private [companies],” she says.
As they find themselves allocating more capital to private assets, Ms. Debas says Desjardins portfolio managers are seeking information on environmental metrics such as greenhouse gas emissions to evaluate investments. Governance has always been part of the evaluation, she says, but environmental and social data are being included more.
“In some private markets, portfolio managers and investors tend to be closer to management and have a great vantage point to demand more information – they’re the ones driving disclosure for as long as it’s not mandatory or mandated by regulation,” she says.
Bruce Flatt, chief executive officer of Brookfield Corp., made a similar point when he spoke at an Ontario Securities Commission event in May.
“The discipline that we have to have for what we are doing to get to net zero, what we are doing on sustainability, how we are reporting it, what information we are providing to them, I would say there is greater scrutiny in private than in the public markets,” Mr. Flatt said.
“When you’re in a room with people on the private side, you can have a full and open and transparent discussion. In public markets, you are set to true and plain disclosure but it is a set of documents you put out and you have to stick with that information, but you can be much more open, transparent and full with investors on the private side.”
Brookfield is looking to double its private equity portfolio over the next five years.
New disclosure standards are coming
Led by the International Sustainability Standard Board’s (ISSB) guidelines establishing baseline disclosures on both public and private companies, formal standards are coming into view in Canada.
Leveraging the ISSB standards that have already been adopted in Europe, the Canadian Sustainability Standards Board (CSSB) is moving toward disclosure requirements being enacted for “various stakeholders, including private and public companies,” as early as next year, Ms. Foley-Wong says. “That’s what they’re aiming for.”
Whether the Canadian Securities Administrators (CSA) will formally adopt the CSSB measures or how those requirements may impact private markets, directly or indirectly remains unknown. The current focus of the CSA is on climate-related disclosure and doesn’t encompass broader sustainability considerations.
“From a broad sense, there’s growing interest [in uniform sustainability disclosures]. Yet, in private markets, there isn’t transparency by definition,” says Steve Balaban, chief investment officer at Mink Capital in Toronto.
“I would guess the CSA wouldn’t make all of [the CSSB disclosure rules] mandatory. It will be, and probably should be, a balance,” he adds.
There are also other efforts to foster uniform reporting specific to private markets.
In 2021, the Institutional Limited Partners Association kicked off the ESG Data Convergence Initiative (EDCI), an industry-wide program to streamline the private investment industry’s approach to collecting and reporting ESG data. The initiative collects anonymized data annually from roughly 4,300 companies backed by more than 275 buyout firms.
Information in the database covers greenhouse gas emissions, renewable energy usage and work-related accidents. As of 2024, the EDCI had more than 400 participants overseeing US$28-trillion of assets worldwide, according to Bloomberg LP.
“In many respects, it’s already happening – from the investor to the funds, and from the fund onto the portfolio company,” Mr. Balaban says of ESG disclosure in private markets. “It’s difficult to collect the data. You need to streamline them, which the industry is trying to do.”
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