The debate is still raging over what ESG data fund managers should be collecting. Many cannot keep up with the various disclosure demands from regulation, industry initiatives and LPs, and they are being vocal about it.
Despite widespread uptake of the ESG Data Convergence Initiative, the PRI and other ESG standardisation efforts, GPs still receive anomalous and bespoke disclosure requests from LPs. At PEI Group’s Responsible Investment Forum last week, PE firms’ heads of ESG reported being asked for such unusual data as “hundreds of [portfolio company] policies” and numbers of transitioning or non-binary employees in their portfolio. “We just don’t think it’s needed or appropriate,” said one panellist.
While some GPs wrestle with non-standard requests, others are resisting the push for standardisation. Initiatives such as EDCI require GPs to collect data that is “not necessarily material to my value creation strategy,” one panellist said. Another said their firm does not measure the emissions of service sector companies, because it does not affect revenues; similarly, the firm only monitors human rights issues if the company “outsources labour” from outside the US.
The problem is that standardisation is a critical step to make any ESG reporting meaningful: we need comparable data and benchmarks to evaluate the sustainability credentials of investments.
Between all these disclosures, dealmaking and company management, ESG teams are certainly busy. It is especially challenging for mid-market firms with just one or two professionals covering ESG. Completing questionnaires “is a full-time job”, as one panellist said, and diverts resources from working with companies on operational sustainability.
Fund managers are sometimes denying LPs’ bespoke requests. Why? Some data will be unreliable, near-impossible or even illegal to collect (such as certain DEI data in Europe), said panellists. In other cases, the ESG team simply does not have capacity.
It takes some backbone for firms to say ‘no’ to LPs. But these ESG heads have a point: they may already be compiling EDCI, PRI, TCFD, SFDR and other reports, and these are sufficient for many LPs and regulators. LPs’ requests may be important, but in an industry shaped by partnerships, they will need to compromise in order to participate. LPs requesting bespoke data should evaluate what their priorities are – and be prepared to hear ‘no’.
But GPs’ exclusion of standardised ESG indicators is also untenable. Many indicators that do not impact revenues are nevertheless critical for companies’ long-term value and resilience: regulators and buyers may require carbon emissions data in the future; supply chain data can uncover vulnerabilities in the event of trade embargoes or travel restrictions. Having a track record on these indicators, and experience collecting the data, will be invaluable in such scenarios.