Why isn’t this a standard? | Insights from a Climate Change Investor

AVG Group Sarl,  a climate change investment firm in Norway, recently engaged with Rio to to better understand their ESG performance and areas of improvement. Together undertaking and assessment of each company in AVG’s portfolio against material ESG issues using a customised methodology aligned with SASB and WEF frameworks.

The final report of the assessment is a summary that showcases the positive environmental impact that one investor has when investing in AVG’s fund. The report also provides visualisations of environmental data, demonstrating the direct impact of individual investment through key metrics such as carbon emissions saved, homes powered, and equivalent trees planted.

Taking time to sit down with Rio recently, Karl shared his insights and expertise to contribute to Rio's data collection guide for financial services, titled ESG Due Diligence, Compliance, and Voluntary Reporting. You can find more insights, actions and tips in the full guide.

What sort of reaction did you get as a result of starting to disclose the ESG performance of the portfolio through this type of report?

I think the approach we took of breaking it down pro-rata to the investor is the right way to go. The reaction has been one of shock - as they’ve never seen it before. We have shared it with prospective investors as well, but our current investor’s reaction has been to say 'wow we didn’ t know you could actually do that' and largely they’ve been really happy with it.

As we’ve gone to market with other investors and shown them this report they’ve asked 'why isn’t every fund manager doing this? Why isn’t this a standard?' I think we’re doing the right thing by tracking the granular data, and whatever the data spits back as a metric is just a starting point. Creating that simplicity of measurement is the way of the future. That simple data-driven process is the way it’s going to have to go.

What were the biggest motivators for AVG to begin this data-driven ESG analysis?

When you look at ESG more holistically, it is to try and get a better run company. We come from the world of quarterly results, and we’re still held to account on that, but ESG has been increasingly incorporated as an underwriting standard, which then becomes one of the drivers to sell our companies later. 

I think in the macro market, companies that are going to acquire the companies that we invest in are going to look for ones that already have ESG policies in place. There is more value for an acquisition of a company that has ESG policies in place.

Of course, it’s about helping to fight the climate crisis, but if you focus on some of these monetary aspects it creates more enthusiasm for these deals.

What have been more effective methods for engaging with companies in your portfolio on this ESG Analysis?

It can’t be framed as an audit, or an obligation, or that it’s something you have to do otherwise you’re a bad company. It has to be framed as something that you’re going to celebrate and to sing from the rooftops. That they’re empowering the market to understand them better, a truly data-driven ESG report, that is granular and methodical.

It’s a good thing to be able to take your temperature and say yes we’re a green company and we’re also working holistically to improve. This can be a real marketing piece that gives them bragging rights with the data to back it up, without the greenwashing. With a detailed report you aren’t just claiming you’re green you actually have the numbers to back it up.

Additionally, this is building into lending models and credit models, where credit scores and premiums from insurance companies are going to have an ESG attachment soon enough, and the quicker you can explain your ESG performance, then the lower the cost of capital and the lower the premiums you will have to pay. It’s just a smart thing to do, short and long-term.

Why would you say you chose a customised methodology aligned with SASB and WEF frameworks?

I think underwriting is a customised thing to begin with, and we’re thinking long-term. You go to the doctor and yes we are all human, but we all have individual characteristics too, I think a customised approach unearths other trends that third-party ratings providers won’t catch. Some of these providers are also coming from a different field, and overall from a more macro approach. Whereas we’re looking at a more granular approach.

What would you see coming up as trends with ESG?

Finding carbon emitters and then trying to figure out how and what incentives will work to drive capital to reduce emissions as fast as possible. I think that’s the most logical channel for capital markets and insurers, which is a big swathe of the economy. You hear a lot of the high level policy stuff, like at COP26, and our job in impact investing and private equity is to translate that into market solutions.

Want to know more?

Our latest guide, ESG Due Diligence, Compliance, and Voluntary Reporting, provides a snapshot of the ESG due diligence data landscape, and some practical steps for collecting data. This guide is designed to provide practical and clear insights on the common challenges and suggested actions for pre-investment ESG data collection.

To hear more from Karl, watch our panel discussion held at Global ESG Live: 'Mapping the EU SFDR and the road to heightened ESG disclosures.' This panel was moderated by James Holley, Head of Environment, Social and Governance (ESG), Bridgepoint, with speakers Dan Botterill, Founder and CEO, Rio ESG, Karl Andersen, Managing Director, AVG and Silva Dezelan, ESG Director, Stafford Capital Partners

You can also learn more about Rio, or contact us today to book a meeting.