ESG Data in Illiquid Markets

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Stockholm (NordSIP) – Data is one of the recurring topics of concern for sustainable investors. While accounting and tax reporting has streamlined financial reporting for companies, no such requirement is yet in place for all sustainability top investment factors. While businesses, investors, and regulators have started to make significant strides towards collecting some of this data for listed companies, illiquid investments remain a challenge.

To help investors in illiquid assets understand how they could overcome this hurdle, Danish pension company ATP published a report on ESG in illiquid markets, discussing its own approach. The Danish pension defines illiquid assets as those for which there is no established trading channel through an exchange. In these cases, “the investor has to spend time on identifying a buyer willing to pay the correct price for the equity.” ATP’s illiquid assets include investments in private equity, infrastructure, real estate, forested lands, and certain types of credit. “As the buying and selling processes are notably more extensive than for listed assets, a deeper analysis is required of several issues, such as legal, financial and ESG issues, etc. when ATP acquires this type of asset.”

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Much of the focus of the document focuses on ESG data collection. “Our top focus area in 2020 has been the collection of ESG data from our illiquid assets. We want our ESG work to be effective, which means we must employ data that allows us to track progress and draw comparisons. In general, illiquid investments are not covered by ESG data providers to the same extent as is for liquid investments, making data collection a challenge,” the report explains.

ATP’s developed its own ESG questionnaire for illiquid investments, based on the Sustainability Accounting Standards Board (SASB). The first responses have convinced the Danish pension fund of the value of this tool for its ESG-related work. “The questionnaire is built around three topics: Policies, processes, and performance,” according to the report. “Policies are a precondition to having processes, and processes are a precondition for performance. Thus, the questionnaire has a natural hierarchy that ensures that companies work at the right levels in relation to their stage of development and are focused on the potential of ESG in their efforts to create value.”

The design of the questionnaire was guided by a focus on simplicity, materiality, and to fuel engagement with the companies, so that ATP may provide useful feedback. “Stewardship is one of our ESG principles which applies across asset classes,” says Martin Præstegaard, Deputy CEO at ATP. “In other words, when we say that stewardship matters to us in relation to our listed equities, it matters just as much to us in relation to our unlisted investments. Whenever we make large investments, we get the opportunity to utilise the extra resources required to sit on a company’s Board of Directors. A seat on the Board of Directors is a major responsibility, which is why it is so important that we can set aside the time and right key staff from ATP that such responsibility requires. That is also why it is typical for us to claim a seat on the Board of Directors in our large, strategic investments.”

 

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