This post addresses the unique impact data reporting challenges faced by the private infrastructure investment market. Organized in a ‘capital stack’ that typically leads from asset to fund managers (i.e., general partners or “GPs”) to fund-of-funds managers to limited partners (“LPs”) and eventually capital owners, the investment market is characterized by a complex web of stakeholders navigating unique reporting requirements.
Given these complexities, investment fund managers at the forefront of the inclusive energy transition are asking the following question:
How do we verify energy transition data at the asset and company level to meet all stakeholders’ needs while protecting data integrity and reducing costs?
CASE STUDY: ADIANT CAPITAL
Adiant Capital, a private market impact investment firm based in Switzerland, invests in companies that mitigate climate change, protect natural resources, and preserve biodiversity. Adiant Capital’s impact investments align with the Paris Agreement’s objective to limit warming potential to below two degrees Celsius by the end of the century. Therefore, the firm currently focuses on forward-thinking environmental investments in renewable energy, low-carbon transport, and digital infrastructure. Pierre-Loïc Caïjo, founder of Adiant Capital, says:
“In terms of sustainability, our principles of action are truly ambitious and go beyond traditional environmental, social, and governance (ESG) criteria. While listed companies are now required to identify and report on the ESG risks they are exposed to, it is far from adequate and does not interrogate its true impact or challenge the company’s business model and activities.”
According to Pierre-Loïc, the regulatory landscape presents a complex set of frameworks to understand and apply to investment activities — such as the Paris Climate Agreements (2015) and the 2030 Agenda for Sustainable Development (2015). Those milestones have given new impetus to regulators. Their objectives are translated into complex regulatory pieces such as the Sustainable Finance Disclosure Regulation, the EU Taxonomy, and the Benchmark Regulation. It further impacts existing regulations (e.g., MiFiD2, UCITS, AIFM). This set of rules apply to any public or private financial products to be distributed to European investors. Other jurisdictions appear to be following the same trend to promote more transparency in the sustainable investments area, eliminating “greenwashing” and redirecting private capital flows towards sustainable investments.
A standardized and widely accepted methodology that meets the upcoming EU regulatory obligations does not exist yet in the infrastructure industry. Only a handful of specialized asset managers have anticipated the regulatory move. Similarly, there is no standard methodology in the existing ESG reporting area, resulting in a plurality of standards and providers. More importantly, access to quality and reliable data at the asset level is inconsistent.
Collecting and maintaining the data’s integrity is a hurdle, primarily if the portfolio company controls the data and is only in analog form like a published print report. If the data must be collected manually or employing questionnaires, the cost starts to rise at every level of the investment stack. Pierre-Loic sees the future in digital platforms. Once the data is captured in digital form (on a blockchain), it can function as collateral for future digital tokenized investment products, increasing the mobilization thanks to their capital liquidity to more impactful assets.
Limited partners are under increased pressure — environmental, social (beneficiaries), and regulatory — to report on impact or sustainability in their investment portfolios. However, the market currently lacks a verified impact reporting infrastructure that can be applied efficiently across the entire capital stack. Since no standard impact data reporting methodology exists, every member of the capital stack relies on their particular view, standard, or metric, resulting in non-standard reporting, a lack of transparency, and no single source of truth.
Obtaining impact data is expensive, time-consuming, and resource-intensive, especially for a task that has not historically added clear value. Since impact data collection has not traditionally added value for portfolio managers, it is seen as an additional cost center rather than a source of growth potential. As a result, measuring investments’ environmental or social impact is not a task that an asset manager ordinarily prioritizes.
What if a real-time, verified, integrity-protected impact data footprint existed at the asset level, which could:
- Be passed along the investment chain by every stakeholder, fund manager, or impact data metric official any time it is required;
- Provide the collateral to perform independent risk-adjusted return analysis
- Be the “source of truth” for future securitization into tokenized investment products with embedded impact and ESG data?
Compared to the conventional burdensome impact data collection practices, the potential time, cost, and integrity benefits of such a harmonized impact data model span the entire capital stack, ranging from increased efficiency and improved decision-making to enhanced risk evaluation and more accurate asset valuation.
THE SOLUTION: VERIFICATION AT THE SOURCE
In response to the challenges faced by investment fund managers, Proof has developed a technology platform that allows for digital verification of product, operational, environmental, and societal metrics at their source. Due to the integration of operating systems and IoT, the data is current and real-time rather than driven by field visits and consultants. Every interested party in the investment chain can be provided with unrestricted access to the data and analytics, resulting in greater transparency and decreased duplicity. The benefits of this approach to fund managers and portfolio companies management include:
Harmonized Data Across the Capital Stack
Data is verified at the source, resulting in one centrally managed “source of truth” for all impact data required for reporting. Each stakeholder can derive their required metrics from the original verified data set, and investors can work collaboratively with portfolio companies to understand trends, track investment outcomes, and mitigate risks. Since all stakeholders — from investors to funders to regulators — have access to the same integrity-protected verified data. It leads to consistent and transparent information and communication about high-impact metrics that truly matter and are harmonized industry-wide.
Protected Data Integrity for Immediate or Future Securitization
POI has developed its own blockchain that integrates with other leading chains to protect the integrity of the data as it is passed from one investor category to the next in the chain. The data is visualized on a POI dashboard. This allows for more straightforward calculations of the contribution of each investor, funder, or client to the asset’s impact results, so that the attribution of each investor contribution is clear, defined, and not overlapping or double counting. This tokenized data will become the tokenized investment product with embedded ESG and impact data.
Enhanced Decision-Making Capabilities and Capital Efficiency
The real-time nature of impact data means that decision-makers at each level of the capital stack can make an immediate investment or allocation decision based on the data, saving time and shortening the timeline to investment. Data may also have predictive capabilities. Over time, investors can identify which impact or sustainability data factors could indicate future cash flow, resulting in higher cost-efficiency, stronger product market positioning, and greater revenue streams. Next-generation investors demand transparent assets that report on their holistic performance in real-time; this could let early adopters of verified impact reporting capture higher environmental and financial performance over time.
Increased Cost-Effectiveness of Data Capture, Verification, Monitoring, and Reporting
The costs to capture, verify, monitor, and report on the data are one-off at the asset level. The access to decision-making data reduces expensive financial, intermediary, and due diligence costs at the time of investment. Furthermore, analysis and reporting at different levels in the stack all become more cost-effective. The POI platform is the most valuable impact and ESG measurement solution per dollar due to its potential to make investment decisions ex-ante and track the performance of the asset or portfolio ex-post:
Before entering into a deal, investors can request an ex-ante impact or sustainability due diligence, via the POI Digital Assessment, to identify the environmental and sustainability targets the company has set, the data sources that provide evidence of tangible contribution to these goals, and qualitative analysis of the return on investment based on these goals being achieved
After the initial investment is made, investors can track the data of the asset and/or company and pass this “digital footprint” and data stream on to their LPs without any further interventions. This data can be sliced and diced according to each investor’s needs, whether it is meeting their regulatory and performance requirements or creating benchmarks and peer-to-peer comparisons
The GIIN’s recently published “Methodology for Comparing and Assessing Impact” lays out in detail how investors can leverage impact data to make more informed and effective investment decisions and enhance their overall fund performance. Examples of decision points that can be enhanced with impact data include:
1. Portfolio construction, including which investments most closely align with the fund’s and LPs’ impact and financial risk and return goals
2. Due diligence, including where to invest based on investees’ projected impact achievement
3. Investment management, including how investees are performing relative to the portfolio’s impact and financial goals
4. Exit or realization, including decisions on when and how to exit and whether or not to reinvest
5. Reporting and disclosures, including the use of impact data to fulfill reporting requirements and build the fund’s brand as a leader in data-driven measurement
This GIIN publication provides a baseline methodology for investors. Still, it’s important to remember that no matter how good the IMM methodologies are, they can only be as good as underlying data collected.
Proof aims to lead the next evolution of business intelligence through verified ESG & Impact Data. Every company is unique. Your ESG priorities should be unique too. Learn how your company can leverage solutions for digital ESG and impact management.
Reach out to the team via our website.