Private equity’s push for standardised ESG data can be a distraction from value creation efforts, several heads of ESG at private equity firms have reported.
Fund managers are forced to collect data that is “not necessarily material to my value creation strategy” for LPs’ ESG due diligence questionnaires and data requests, and data requirements for voluntary initiatives such as the ESG Data Convergence Initiative, said one head of ESG at a mid-market private equity firm. Speaking at PEI Group’s Responsible Investment forum last week – held under Chatham House rule, meaning speakers cannot be named – the head of ESG added: “If I’m trying to capture a broad range of stuff to meet all the various stakeholder interests, I’m not doing deep [ESG work].”
Speaking specifically about the EDCI, which has six mandatory metrics for fund managers, the speaker added: “I understand the idea of going to a smaller set [of metrics] so that you can have comparability, but I defy us from doing that” because the firm pursues a more focused and customised ESG strategy, “and that’s how you get authentic and accurate [data]”.
“We are taking the materiality approach and we want to bake [ESG] into value creation… so the data we are seeking [is] very nuanced and tailored for our portfolio companies,” another mid-market private equity firm’s head of ESG said. “I often use this example of, if I cannot articulate the business case for where we need this data to my CEOs or CFOs, they probably shouldn’t be collecting the data.”
“But then I also have to keep in mind that our LPs are asking us for certain information. There’s only so many times you can go back to them and say, ‘We aren’t collecting this because it’s not material’,” the second head of ESG said. “I tend to have a lot of conversations with LPs about what they’re using the information for.” Some of these reasons are “understandable”, such as for the EDCI or SFDR, but in other cases LPs did not have a reason for wanting this information, the head of ESG added.
By completing these data requests, ESG professionals at mid-market firms – who are often operating as one-person teams, “are not doing anything particularly useful”, said an ESG head at a third firm. “It’s not that the data is useless; it’s just incomplete” as the context and experience of the portfolio company is lost.