Matt Simms will be speaking at the Institutional ESG Investment Summit, which is taking place on the 16^th and 17^th September. To find out more about the event or to book to attend, click here.

Fund Operator: What draws you to the use of ESG factors and philosophies when assessing private market allocations and the managers who specialise in that field?

Matt Simms: I don't think it's just the markets. You've got to consider ESG factors across your entire portfolio and private markets are no different in that respect. And it shouldn't just be managers who think about ESG, everyone should be incorporating this.

If we're defining ESG considerations as financially material, then surely that's an important part of any investment process. Governance is an obvious one - it's well understood that you need companies you invest in to be well-run - but the E and the S are just as important.

There are now many more metrics available from different providers and that's really well needed because it plays to that quote by Peter Drucker: “what gets measured, gets managed.”

“You've got to consider ESG factors across your entire portfolio and private markets are no different in that respect”

We do need to be a little bit careful that we aren't measuring and managing the wrong things, though, and patting ourselves on the back, that we're doing a good job.

Specifically to private markets, I think the ownership structure in private equity, for instance, may well give [firms] the ability to bring about even greater change within companies they invest in and specifically then even greater change around ESG,

Fund Operator: Does a herd mentality exist in private markets, where many investors are chasing the same high quality investment options?

Matt: I've been in and around pension schemes for a long time now, and invested in private markets for all that period, and I don’t think it’s really new thing - that herd mentality into private markets.

It's true that there's been a bit more buzz around it over the last few years and some of that momentum will be because of lack of attractiveness at times within the traditional space. When spreads and credit in the listed market are really tight, it might make sense to look the private credit.

So, there's always going to be pockets around the market that become expensive and perhaps some might say that the more ESG-friendly investments fit that bill these days.

“Private markets investing potentially lends itself to pushing companies along that journey”

However, I've always thought that it's not just about buying the perfect company or in this instance, the company with perfect ESG characteristics. There can be a lot of value in looking at those companies that can change towards being the perfect company or having those perfect ESG characteristics. And hopefully you'll be well rewarded for being on that journey.

I think private markets investing potentially lends itself to pushing companies along that journey given the ownership structure in private equity, but even in private debt space… managers have got a really loud voice when they're originating private funding rather than bonds changing hands between investors in the secondary market.

Fund Operator: What are the top three questions you would ask any third-party manager about how they use ESG investment factors in their investment portfolios?

Even before we get into a discussion about ESG factors, you need to be satisfied that investment manager has investment skill. There’s going to be a lot of the normal research questions and interrogations.

Given the nature of private markets, some areas of the questioning may have more emphasis than others compared to the research process in the listed space.

In private markets, manager selection is more important than macro factors, so you really need to go in and do the due diligence on the investment piece first.

“In this space, want to be able to see the outcomes from the ESG factors too”

Secondly, looking at the ESG piece, there's two main areas that I'm going to want to press on. Number one how is it integrated into the overall investment process. Integrated is the important word there, because it needs to not just be an add on to a product they already have.

Then the second area is going to be what is the framework for measuring impact - the quantifiable metrics to it all. You can obviously measure or see the return outcomes that you achieve from any investment, but in this space, want to be able to see the outcomes from the ESG factors too.

Fund Operator:  Why is is important to debate the role of the of ESG in allocations.

You need to have a level of understanding to not just be swept up in the buzzwords, particularly in private markets, because you can have a real impact when you get it right.

Matt Simms will be speaking at the Institutional ESG Investment Summit, which is taking place on the 16^th and 17^th September. To find out more about the event or to book to attend, click here.

 

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