Lincoln International discusses several key considerations for private companies, lenders and sponsors working to keep up with the rapidly evolving ESG landscape.

Two recent examples illustrate this trend amongst large, publicly listed asset allocators. In BlackRock CEO Larry Fink’s annual letter to CEOs this year, he pinpointed climate transition as the next historic investment opportunity. Late last year, the NASDAQ stock exchange filed a proposal with the SEC to require companies listed on the exchange to publicly disclose statistics on the diversity of their boards.

In addition to capital allocation, sponsors and lenders are increasingly incorporating sustainability considerations into their due diligence and reporting processes to gain a better understanding of the companies in which they are deploying their capital. As demand for responsible investing accelerates, which stakeholders often expect capital allocators to mirror, more fund managers are making ESG reporting a core part of their internal investment evaluations and shifting their strategy to better align with investor priorities.

Though enthusiasm for ESG investing has been embraced more slowly in the U.S. than in Europe, the rising interest from investors has been observed globally. We expect the continued adoption of ESG considerations in investment decisions as market participants around the world define their own sustainable investing strategies, and stakeholders—from everyday consumers to private equity LPs—increase pressure to allocate capital responsibly.

Standardization of ESG Reporting is on the Horizon, But Not Yet Cemented

For lenders and sponsors evaluating investment opportunities, one essential key in this reporting process lies in measurability. When it comes to financing or launching a sales process, demonstrating ESG performance to lenders or investors can be integral to a deal. We have seen many reporting requirements on sustainability initiatives remain based on company self-disclosures, with limited uptake of the newly forming standardized frameworks. The risk remains present for companies to cherry-pick favorable metrics to demonstrate performance.

Sustainability reporting standards are rapidly evolving as LPs look for more transparency into private funds’ performance on highly varied and divergent ESG factors. While a universal standard for reporting has yet to be established, regulators and market participants are in the early stages of discovering bespoke reporting and internally developed methods that work for them.

ESG is a process—not an endpoint. Lincoln expects some capital allocators to look for an established framework for future progress around ESG impact. Going forward, we expect continuity of sustainability commitment will be noticed by investors, developing a strategy to achieve sustainability goals should be discussed for companies looking to tap into capital markets.