BLOG — Apr 11, 2022
A quick-start guide to ESG data collection for private equity investors
By Alex Merola
Highlights:
- ESG focus is growing and will likely intensify over the next 18 months.
- While public market data is abundant, private asset data remains elusive; PE managers are compelled to collect their own information with the help of available frameworks.
- Many ask: "How do I begin collecting ESG data from my portfolio companies so I can become more attractive to investors?"
Investor demand for ESG reporting is growing
Demand for reliable environmental, social and governance (ESG) data and reporting is accelerating worldwide. A contributing catalyst is the fast-approaching July 2022 deadline for EU SFDR (Sustainable Finance Disclosure Regulation) reporting, which seeks to provide investors with more insight into sustainability risks and to make it easier to compare the sustainability of financial products. While the first level of the disclosure regulation has been in force since March 2021, additional requirements will be required beginning in January 2023. Learn more about the EU SFDR.
Another catalyst is the intensifying demand for ESG reporting from Limited Partners and asset owners. Investors say such information matters more than ever, but sourcing ESG data from holdings remains a challenge for PE firms. Recent research[1] reveals that most LPs' (70%) investment policies include an ESG approach. Over the next 3 years, LPs will focus their ESG efforts on climate change, transparency, capacity building, and improving Diversity, Equity, and Inclusion (DEI) data.
Getting the data you need
Most asset managers rely on a combination of data providers and internally collected data to respond to regulatory and investor requests. There are several major frameworks that help private markets firms define their strategy for collection and reporting ESG information.
ILPA(Institutional Limited Partners Association) ESG Assessment Framework
The ILPA framework is a resource for private asset managers and limited partners seeking to evaluate and understand the various stages of ESG integration. It is designed to inform goal-setting conversations and measure ESG integration progress over time.
SASB (Sustainability Accounting Standards Board) Industry Specific
The SASB Engagement Guide provides guidance on how asset managers and owners can use the SASB standards to inform and enhance their engagement with companies. SASB standards identify the sustainability issues most likely to impact financial performance of companies in 77 industries. For every industry, the guide poses questions investors can ask to facilitate a more complete and robust assessment of long-term risks and value creation.
GRESB (Global Real Estate Sustainability Benchmark)
Companies and other entities in the real estate and infrastructure industries use GRESB to measure their ESG performance within a standardized and globally recognized framework. Additional information is available from GRESB.
Take a forward-looking approach now
In addition to these reporting frameworks, obtaining feedback from your investors is key to developing a strategy for holistic ESG reporting. Recently, we have seen an acute increase in demand for Diversity, Equity, and Inclusion (DEI) data at both the portfolio company and GP level.
Start with a modest but meaningful set of metrics that your portfolio companies can easily and accurately measure. Developing your disclosures with the best available data now will make year-over-year comparisons easier and more useful for investors when they become required. Centralizing that information along with the rest of the financial and performance data you collect and monitor from your portfolio companies makes it easier to access, analyze, and report. You'll not only be able to look at historical data, but also draw additional insights into ESG performance trajectories over time.
Next Steps
Learn more about our ESG collection and reporting solutions for private markets, or obtain a "best practice" review with our experts:
[1] Source: Survey of limited partners (LPs) by Bain & Company and the Institutional Limited Partners Association (ILPA): https://ilpa.org/bain_esg_report_22/
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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.