Introducing Cyan’s Core ESG & Impact Metrics for Private Assets

A curated and practical set of decision-useful metrics

By Beth Richtman, Managing Partner, Cyan Capital Partners

During my years at CalPERS, I experienced the need to have credible, practical and useful metrics that could be aggregated to measure and track risks, opportunities and, importantly, impacts across private asset portfolios. Since founding Cyan, private asset managers have repeatedly asked us for guidance on which ESG and impact metrics they should track to best tell their stories, meet the needs of institutional investors and conduct their own risk, opportunity and impact analysis.

All investments have impacts: positive or negative, intentional or not. Further, all investments operate in a particular environmental, social and governance (ESG) context that creates risks and opportunities managers need to be aware of to better manage their portfolios. Though every private investment strategy is unique, there are ESG and impact topics that are broadly relevant across private assets and which have associated metrics that we believe can and should be measured across private strategies.

Accordingly, managers need a useful system to identify risks and opportunities, track progress toward outcomes and report to their limited partners (LPs), who are increasingly concerned about the ways ESG factors effect financial results. Developing an ESG and impact measurement and management system can be a challenge even for the most well-intentioned/impact-focused managers who often struggle to navigate the sea of current metric options, let alone those managers simply looking to identify ESG risks and be responsive to their LPs.

Our goal in developing and sharing Cyan’s Core ESG & Impact Metrics (henceforth referred to as “Core Metrics”) is to offer private asset managers a curated set of Core Metrics to get them started, enabling them to:

a) identify and manage ESG risks and opportunities
b) track positive and negative environmental and social impacts
c) deliver data that their LPs can aggregate, analyze and use to better understand their portfolios and managers
d) efficiently leverage, and get to know, existing industry standards and frameworks

In developing these Core Metrics, we focused on usefulness and practicality. If a manager has made a net zero commitment, it will need a robust process to track its portfolio companies’ impacts and to hold itself accountable to LPs. For managers focused on social strategies, this framework can help them discover material environmental risks or opportunities that could be managed for greater financial and impact results. With these metrics, we aim to help sustainable investments managers avoid the myopia of focusing only on their obvious intended impacts and to instead understand and manage the fuller spectrum of ESG risks and opportunities that can determine their success. For managers without a specific impact focus, we hope this framework can help them better understand and manage their investments’ positive and negative impacts, and hopefully discover opportunities where better management of ESG risks and opportunities can be sources of alpha.

Importantly, we believe portfolio companies will find these metrics aligned with, and additive to, many of their current practices and not overly burdensome. Also, these quantitative metrics will be easy to use in analysis to understand intensity of positive and negative impacts by revenue or investment amount, allowing comparability across investments. Finally, as LPs are increasingly concerned about “greenwashing,” we believe managers with a systematic and robust approach to tracking both their ESG risks and opportunities and their positive impacts will be seen as better partners to the capital sources they seek.

So much great work has been shared across the finance industry, through important initiatives such as the GIIN’s IRIS+ tool, GRESB and the Value Reporting Foundation. Wherever possible, we have leveraged and referenced their existing metrics to support standardization across the industry, rather than contribute to metric sprawl. We know that many existing frameworks, databases and initiatives around ESG and impact metrics are emerging. Having reviewed them, we still felt it was important to offer ours as an additional option to consider for managers developing their impact and ESG reporting and management systems.

In selecting our metrics, we strived to balance volume of metrics with utility. Tracking only a handful of metrics may make things easier in the short-term, but leaves investors exposed to significant unidentified risks and opportunities within their strategies. On the other hand, too many metrics can be overwhelming or even paralyzing. Accordingly, we’ve labeled a few metrics Core+ as these may be critical to many investment strategies, but for others these metrics will lack materiality and thus won’t make sense to track. We also encourage managers to supplement these Core Metrics with additional metrics that capture ESG and impact data material to their specific investment and/or impact strategies.

In some cases where we haven’t seen metrics that we think should exist, we’ve proposed our own. A few examples you will find in the framework:

Land Metrics for Biodiversity: Given the complexity of biological systems, many investors do not know where to start. As a starting place, we propose reporting on these land-focused metrics for any relevant strategies that involve land. Examples of relevant assets include real estate and agriculture investments whose conversion and use of land can have direct effects on biodiversity. With these metrics, land area can be used to understand the scale of positive and negative impact, similar to how tonnes C02 or volume of water are used.

• Land converted to commercial use during the reporting period (area)
• Land newly protected/restored/sustainably managed (area)

We also note that Cyan recently launched a project with a group of Columbia Business School students to map the landscape of investments that provide solutions to the twin crises of climate change and biodiversity. We look forward to sharing findings that may inform our views on biodiversity metrics as many impacts on biodiversity indirectly result from a variety of industries and business activities rather than just land use. We are also participating in the IRIS+ working groups on biodiversity metrics.

Reach Metrics for Scale of Impact: When we think about a company’s impact on society, we consider the people it employs and the people impacted by its products and services — the number of lives touched. To calculate the latter, we developed several Reach metrics.

Governance Metrics for Preparedness in a Changing World: We introduce some new metrics to help investors understand their portfolio’s preparedness for long-term success in the face of a changing world. For investors making net zero commitments, some of these may be particularly useful such as:

• % of portfolio companies that have set a SBTi Net-Zero Target
• % of portfolio companies with long term (> 5 year horizon) strategic planning

You can view all of our metrics, rationale, and reporting directions (where applicable) here.

Our hope is that managers who implement some or all of our metrics will benefit from a more thorough evaluation of the ESG risks and opportunities facing their portfolio and have the data they need to make informed decisions to enhance the financial performance and positive impacts of their investments.

Download a PDF here