LPs are asking for ESG data that is “not needed” or “not material”, and GPs are declining to collect or share it, according to ESG heads. It is a further sign that despite numerous frameworks and initiatives to standardise ESG data collection in private equity, the tug-of-war between GPs and LPs is far from resolved.
A mid-market PE firm’s LPs are “stretching to add new ingredients” to the list of ESG disclosures they require from the firm, its head of ESG said at PEI Group’s Responsible Investment Forum last week. The conference was held under Chatham House rules, meaning speakers could not be identified. “We’ve gotten surveys recently asking us for the number of non-binary employees or people transitioning in a portfolio company; or the number of second and third generation immigrants in a portfolio company… We draw a hard line on some of these that we just don’t feel like we need to be engaging in.”
The firm “feels protective of our companies and… [want to] use their time and resources appropriately. I don’t want to know some of that [employee] information. In my mind, it does not affect the way the company is valued or its productivity. I do not see how that applies to the exercise that we’re actually trying to contribute to, which is sharing information on the investment and the value of the company.”
A second firm described receiving a due diligence questionnaire from an LP requesting a broad range of policy documents, some with only tenuous links to ESG, from each of the portfolio companies. “We just don’t think it’s needed or appropriate. At some point, I just had to say, ‘You know what? You just don’t need that,’” said the firms ESG head.
“Look at the EcoVadis score,” is what the ESG head told the LP. On the panel, she added: “The company is scored by EcoVadis, which is in the business of rating policies. Some of our LPs and lenders are not experts at evaluating policies and do not need to see hundreds and hundreds of policies.”
“I’ve talked a lot of people in this room, and about half of the GPs are not now sharing portfolio company data with LPs,” she added. This is because “there’s a lot of concern and speculation” about the integrity of ESG data and whether a firm should be sharing it, if it is not third-party audited.
These mid-market firms are often declining to collect this data due to scarcity of resources. Their ESG functions are typically single-person teams and “we are all stretched so thin” (as one ESG head put it). “We’re going to need to hire people in our firms to respond to surveys. [Getting into] the granularity of that sort of detail at portfolio companies… is a full-time job,” said another. Many panellists echoed the view that scrambling for this data redirects resources from materially relevant sustainability work with portfolio companies.
“The cheapest and easiest thing to do is to just ask why” the LP wants this data, said the first firm’s ESG head. Having a conversation with investors to resolve this issue was a common theme among these panellists. “We took a stand by saying, ‘I will give you everything that you need from a regulatory perspective.’ But ultimately all this information is largely being requested outside of regulatory purposes,” said the second firm’s ESG head.
Many LP requests are “for the SFDR, or because they’re singed up to the ESG Data Convergence Initiative”, said the third firm’s ESG head, “but others were asking for certain things and there was really no ‘why’ behind it.”
The second firm’s head of ESG has a “proactive” resolution: the firm is producing a report for its LPs, lenders and other stakeholders with a summary page on every portfolio company, including the most material ESG metrics and progress and yearly progress on relevant sustainability themes. “My plan is to send this proactively to everyone and say, see you next year.”