ESG in Private Equity: Searching for the data?

The demand for ESG (Environmental, Social and Governance) and the need for climate action to address broader societal issues including, diversity, pay equality and human rights has reached a tipping point – particularly in financial markets, with Private Equity (PE) firms and their investors recognising ESG as a core component of strategy, deal execution and value creation.

Central to this is the demand for standardised, comparable and consistent reporting of ESG data to benchmark organisations and inform investment decisions. This is a particular challenge for PE given the historic lack of focus on ESG reporting and is further exacerbated by the lack of a single global framework for ESG data capturing, which is the focus of the newly formed International Sustainability Standards Board.

Recognising the challenge and opportunity  that this presents – and given the sheer volume of portfolio companies involved - PE firms are beginning to collaborate on this issue by forming coalitions such as the ESG Data Convergence Project, which brought together seven General Partners (GPs) - Blackstone, Bridgepoint Group Plc, Carlyle, CVC, EQT AB, Permira, and TowerBrook - representing more than $4 trillion in assets under management. A core set of ESG metrics across six categories were agreed upon for them and their portfolio companies to report back to their Limited Partners, which resulted in the coalition growing to 74 GPs and counting. 

This is an important step forward, and it is one that should not be taken in isolation. It will be critical to ensure that the data being captured focuses on the relevant issues and impacts most important to these individual portfolio companies and funds. 

Crucial to this is recognising that standardisation in reporting of ESG metrics will not always be the aim due to the individual nature of the specific products, services or business models available. However, consistency, where possible, or where the same metrics are being captured, will continue to be an important part of this process, with collaboration among PE firms enabling further positive outcomes. 

When done on its own, measuring ESG performance does little to fulfil sustainability goals and create positive impact. For example, measuring carbon emissions does not drive action toward “net zero”, just as reporting on workforce diversity does not do anything to create a more inclusive and diverse workforce. We are already seeing progress on this front, with a range of net zero, decarbonisation and diversity targets being set by some PE firms. But moving forward, we would expect these public commitments and targets to progressively cover a broader set of ESG strategic priorities. 

With all of this in mind, what does this mean for PE firms moving forwards?

In order to move the dial on ESG and provide stakeholders, investors and customers with the insights and transparency that they need, PE firms and their portfolio companies should consider purpose, strategy and impact at the same time as capturing and reporting on the appropriate ESG data. Key overarching questions include:

• What are the fund-level ESG objectives the firm has agreed on?
• What are the relevant ESG issues facing each portfolio company?
• Are the relevant ESG metrics aligned with the material ESG issues being tracked at each of the portfolio companies?
• How does the portfolio company’s ESG performance (based on tracked ESG metrics) support the value proposition of the business? 

For the PE firms that can get this right, not only will it separate their leadership from the rest of the pack; but it will also enable them to meet LP demands and be more attractive to an expanding community of investors looking to allocate capital toward sustainable funds.