Tackling ESG Reporting at a Boutique Firm with Avaron Asset Management
60% of investors surveyed by EY shared that they think ESG risks should be expressed in further detail. With this shift towards increasing demand and transparency, a managing partner must work to nail down efficient ESG Reporting processes. Case studies and guidelines published by research providers help with pinpointing ways to satisfy ESG company standards and stakeholder demands, however, “Large-cap multinational companies are getting better at ESG reporting, but the quality of reporting drops off significantly with medium and small-cap companies” according to EY. Large caps have financial flexibility to put the staff hours required for data aggregation and analysis. Unfortunately, the same can not be said for boutique firms.
There is a host of information available on how the corporate level businesses are accomplishing their ESG reporting. To understand more about ESG reporting in the land of small-cap listed equities, we spoke with Valdur Jaht, the founding partner of an independent asset management firm, Avaron.
Since setting up shop in 2007, Avaron has focused on Europe’s emerging listed equities and fixed income value investments. From Poland to Turkey, Avaron is taking on attractive, well-managed companies to eliminate existing inefficiencies and turn a profit. By identifying stakeholder demand and company standard, Valdur pioneered the development of ESG integration and reporting at Avaron.
Stakeholder push for ESG is on the rise
Back in 2011, one of Avaron’s limited partners requested more risk management strategies. Avaron was not the only firm getting pressured for increased reporting at the time. European investors are leaders in incorporating ESG criteria, according to Solari.
In 2012 only 21.5% of ESG related assets were invested relative to total managers assets according to GSIA. In 2016, that percentage jumped to 26.3%. After the suggestion, Avaron immediately took action to incorporate ESG investment strategies, they understood the success of an investment was directly dependant on the longterm sustainability of that company.
Avaron incorporates ESG factors in company risk profiles before making acquisitions.
“In our investment process, ESG issues have the same weight in decision-making as other conventional things that investment managers analyze,” Jaht explains.
Matters of sustainability are as important as metrics like cash flow and scalability since they have such long-term implications. By placing such strong emphasis on the underlying potential of companies stock, returns will be optimized.
Collaboration is an integral part of Avaron’s successful ESG approach. They have joined forces with industry pioneers like PRI, CDP, and Climate Action 100+, demonstrating a clear commitment to sustainability and in-depth reporting. By working with other well established ESG platforms, Avaron has managed to transcend the challenges that come with being a mid-sized firm and has gained access to an experienced network globally.
Since joining forces with PRI nearly a decade ago, thousands of other companies, many of whom are larger than Avaron, have followed suit.
“To be competitive in the region [Emerging Europe] one needs to take this to attention and actually deal with [the data]. It is putting together the business we have and the values we hold.”
Market competition is increasing as the foothold of Western Europe ESG is spreading throughout the continent. LPs pushing for more transparent reporting pairs well with Europe’s increasingly progressive regulation regarding asset management. The obligation to satisfy LP demand and remain in accordance with legal parameters keeps Avaron’s ESG related policy up-to-date.
Do what you can with what you have
While the association with PRI brings value and credibility to Avaron’s ESG reporting practices, it is important to note the challenges that are unavoidable when operating with a smaller team. There is no reporting framework that works seamlessly across the industry, from large firms with hundreds of staff to smaller firms with just a handful of partners and analysts.
In Valdur’s opinion, the PRI framework has been designed to suit larger companies. Data requested by the reporting framework requires extensive personnel to track. This can be a cumbersome process for a ten person investment team. That has left Avaron looking for a more flexible but equally effective approach to ESG reporting. Having a system in place to optimize that effort would aid in translating qualitative information into quantitative metrics.
Standard data aggregation practices require continued communication between portfolio companies, LPs, and asset managers. From spreadsheet, to spreadsheet, to master spreadsheet, repetitive data entry consumes far too many hours that could be spent making analytical decisions to better the firm. With innovation in mind, Valdur sees a brighter future for ESG at Avaron.
Most firms are restricted in their resources available for allocation to ESG integration and reporting, but data proves that incorporating ESG factors into investment decisions can generate higher returns. Industry standards have been developed by networks and programs like PRI, and boutique firms like Avaron need to assess operational procedures to keep up. Identifying technology that enhances the reporting process will give Avaron the competitive advantage over other firms in the market. Satisfying company standards and stakeholder demand is essential for optimal risk management, regardless of how challenging it might be to accomplish.