ESG standardization is coming to private equity markets. The Institutional Limited Partners Association (ILPA), the leading ESG reporting framework for private investors, has announced the ESG Data Convergence Project.
This initiative aims to help streamline ESG reporting among private equity investors. The Project was launched by leading GPs and LPs around the world to improve consistency and comparisons within ESG reports.
Over the past decade the private equity (PE) sector has doubled. In 2021, it reached its highest ever level of raised funds at $1.2 trillion, showing an increase of 14% from 2020. Yet, PE firms are less likely to report ESG performance than public companies.
However, growing interest from institutional investors in ESG reporting is reflected by a recent Natixis Investment Managers survey. It estimates that roughly 72% of institutional investors and 77% of GPs have adopted ESG strategies as of 2021 compared to 61% and 65%, respectively, in 2018.
The ESG Data Convergence Project will further support the ease of implementing ESG strategies in private equity funds. This helps them align with the broader ESG investing megatrend.
By enabling investors to collect and assess ESG data across private investments, investors can more easily target ESG improvements, benchmark ESG positions, and analyze ESG metrics across portfolios.
📖 What is the ESG Data Convergence Project?
The ESG Data Convergence Project launched on September 30, 2021 based on the efforts of leading general partners (GPs) and limited partners (LPs) around the world. The California Public Employees’ Retirement System (CalPERS) and leading global investment firm Carlyle led the effort.
The Project represents the first time the private equity sector has developed a set of ESG metrics across key ESG criteria. The goal is to aid investor evaluations of ESG performance across their private equity portfolios by improving the quality of ESG data available.
👉 Aimed at a long-term impact, this initial effort supports ESG data transparency, availability, and comparability for private equity markets.
To begin with, the ESG Data Convergence Project has established fifteen metrics for six ESG categories: greenhouse gas emissions, renewable energy, board diversity, work-related injuries, net new hires, and employee engagement.
Over 100 GPs and LPs representing over $8T in assets under management for roughly 1,400 portfolio companies have committed to the project.
GPs and LPs will disclose the relevant metrics for their portfolio companies to share with invested LPs. To aid further analysis, Boston Consulting Group (BCG) will aggregate the results and present anonymous benchmarks within the sector.
The collaborative effort welcomes input from stakeholders who support the Project objectives. The Project also invites any GP or LP to commit to the Project and stand by its principles.
The Project is a first step towards improving the quality of decision-useful ESG data in private equity, to eventually improve ESG impact. 💚
💡 Why is the project necessary?
The Natixis Investment Managers survey suggests that investor demand is driving an interest in ESG. Not only has it become a mainstream practice for retail investors, institutional investors have a stronger awareness of ESG issues.
GPs selecting funds attribute investor interest to heightened social awareness (75%), interest in a greener economy (42%), and climate change considerations (36%).
Mounting evidence shows the long-term financial risks of climate change. 💥 A recent SwissRe study estimates that 18% of GDP could evaporate in less than 30 years from its impacts. This is important to institutional investors who seek long-term value creation.
Yet, private equity investors face a significant set of data quality challenges in ESG reporting. Issues as broad as missing data, inconsistent data, partially reported data, and data complexity due to the use of many ESG frameworks have impacted ESG assessments.
Specifically, it has slowed the process of ESG evaluation for GPs, LPs, and their portfolio companies.
The ESG Data Convergence Project addresses these issues by establishing six core categories for ESG reporting. The aim is to improve both the quantity and quality of ESG data available to private investors.
With this data, a stronger set of decision-useful insights can arise from ESG reporting for the private market. The metrics included in the Project aid standardization by limiting the number of key ESG KPIs from across a wide range of popular ESG frameworks.
Voluntary commitment to the project will ensure the data is updated annually along a consistent timeline. Entities reporting under these metrics use the same definitions and norms for reporting.
The ESG Data Convergence Project identifies a limited set of common material KPIs for private equity. In this sense, it is unlike an ESG framework, which presents the principles, recommendations, and guidelines across a wide range of possible material ESG criteria.
It is important to understand the aims of the project as an extension of the efforts of existing frameworks. It supports collaborative input from across the private equity industry to improve its guidelines each year.
The Project describes itself as “tech platform agnostic.” The guidelines established within the ESG Data Convergence Project don’t require technology updates or specific platforms for use. GPs and LPs can manage the metrics using their existing data analytics systems.
🙋 Who can participate in the project?
Any private investor can participate by agreeing to support the Project principles. Stakeholders supporting the project can likewise collaborate to improve the usefulness of the ESG data metrics.
Greater participation supports the Project’s aims of improving ESG data and using it to make a stronger ESG impact across private markets.
📕 What does it mean to be a General Partner (GP)?
General partners (GPs) often act as the private equity firm responsible for managing a fund made up of private investments. GPs have the right to choose the investments included in their portfolios. They also must acquire capital commitments from limited partners (LPs).
📗 What does it mean to be a Limited Partner (LP)?
Limited partners (LPs) act as investors into a private equity fund, and are required to meet the minimum investment of $200,000.
For this reason, private equity is made up of institutional investors, such as pension funds, university endowments, and insurance companies. Wealthy individuals may also act as LPs.
📝 What are GPs and LPs committing to when joining the ESG Data Convergence Project?
GPs: To participate in the ESG Data Convergence Project, GPs can begin by selecting which funds or investment strategies they wish to include in the project.
Next, they can establish a data collection system for these funds. They should collect information on the six categories of the Project, following their definitions and guidelines.
A standard reporting system will align with the “ESG Metrics for Investor Reporting Handbook” or explain when the system deviates from the guidelines.
GPs should make the information on ESG KPIs for the relevant funds/strategies available to LPs using the Project’s standard template. GPs are also encouraged to recommend their LPs participate in the Project.
On April 30 each year, GPs should send the ESG data to the Project’s third-party aggregation system. The data includes the required ESG metrics and normalization metrics for the previous calendar year. The requested data should be anonymized.
Participants agree to public affiliation with the project and they have opportunities for serving on the GP/LP Steering Committee.
LPs: Participating LPs are encouraged to align their ESG data collection requests to GPs with the 6 categories of the project, using the standard template, for any overlapping requests.
They can also use their influence to welcome more GPs to participate in the project. Like GPs, LPs also agree to public affiliation with the project and they have opportunities for serving on the GP/LP Steering Committee.
✅ What are the benefits of standardized ESG reporting for GPs / LPs / portfolio companies?
The ESG Data Convergence Project uses the management capabilities of GPs to promote ESG competitiveness across portfolios, by attracting LP investors with ESG-oriented funds and investment strategies.
Portfolio-level benefits 📂
ESG data reporting can spark healthy competition for ESG categories and metrics across portfolios. The data project offers ways to compare and contrast performance adding more dimension to the overall status of an investment strategy.
The data supports accountability for issues that will likely impact future investments based on macroeconomic trends. The specificity of the KPIs in the Project drive forward ESG improvements in key areas.
Reporting across key categories and metrics gives GPs a chance to specialize in key areas of impact and distinguish their portfolios from other GPs.
The simplified format for reporting minimizes the administrative burden of providing ESG data, so portfolio companies can invest more time into making ESG improvements.
LP benefits 💎
Transparency and accountability are key benefits of the ESG Data Convergence Project. Investors seeking data on the ESG profile of underlying investments can now access streamlined data in order to evaluate portfolio-wide ESG performance.
The improved data can quickly demonstrate ESG performance over time by offering a consistent annually reported format.
Investors seeking long-term sustainable investments can apply more than a single-factor lens to their investments. This enables investors to channel capital towards funds with long-term viability.
With more rigorous ESG reporting that minimizes data gaps and inconsistencies, private fund managers can commit to stronger ESG targets and goals.
Portfolio company benefits 💪
Providing LPs and GPs ESG data incentivizes stronger ESG strategies in terms of ESG targets and goals. Companies can use the data to target areas for improvement.
ESG-linked improvements align with a lower cost of capital along with higher valuations for companies that demonstrate ESG leadership.
Companies gain familiarity with ESG reporting requirements for publicly listed companies, preparing them for future participation in public markets.
👀 Which ESG metrics are being used?
The initial fifteen ESG metrics are assigned across six ESG categories.
GHG Emissions Reporting: Scope 1 and 2 emissions are required, while Scope 3 emissions are optional.
Renewable Energy: Percent of renewable energy in use.
Board diversity: Percent of women on the board (required). The percent of under-represented minorities on the board (required in the US, but optional elsewhere). Percent of LGBTQ members on the board (optional).
Work-related injuries: Number of work-related injuries, number of work-related fatalities, and number of days lost due to injury.
Net new hires: Number of net new organic hires, number of net new total hires, amount of attrition.
Employee engagement: Reporting companies should state whether they’ve conducted an employee survey (Y/N), and provide the employee survey responses (optional).
These metrics were selected by the GPs and LPs that launched the ESG Data Convergence Project based on a set of guiding principles:
Globally accepted: The metrics are globally accepted data points from well-recognized ESG frameworks.
Meaningful: All of the metrics have a significant financial or social impact.
Comparable: The metrics can easily be reviewed and compared across GP funds, portfolios, and portfolio companies.
Responsive: The metrics have the potential to promote more ESG activity over time as the benefits of reporting take hold.
Simple: The metrics depend on data that is easy to collect and provide clearly and definitively.
Actionable: The metrics are areas that GPs and portfolio companies have the power to enact.
Objective: The metrics possess a degree of clarity that does not invite lengthy interpretations.
📑 How will the metrics be tracked and reported?
Using the standard template, GPs will collect data on the portfolio companies in their relevant funds or investment strategies. The data will be reported for the year 2021.
All of the collected ESG data should be delivered in an anonymized format, which provides benchmark information. This data format is designed to share directly with LPs invested in the funds.
📅 How often will the data be requested?
GPs are responsible for reporting annually by April 30th to align with the schedule outlined in the Project. LPs are not responsible for reporting data.
🌳 What about Greenly?
Greenly supports improved data reporting on carbon emissions for organizations reporting to frameworks such as the ESG Data Convergence Project. Our expertise in carbon accounting techniques helps simplify the ESG reporting process for both private and public companies. Book a demo to learn more.
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