For signatories to the Principles for Responsible Investment – nearly all the biggest private equity fund managers – the next reporting cycle is looming. After a two-year hiatus, the new portfolio reporting requirements will be “more rigorous, and stratify the top performers more”, says Peter Dunbar, head of private equity at the PRI.

Thirteen of the largest 20 private equity managers – determined by affiliate publication Private Equity International’s 2022 list of firms by capital raised over the past five years – are PRI signatories. It’s widespread usage means it is even on the US Securities and Exchange Commission’s radar when it is conducting ESG-focused exams on managers.

For LPs, “it’s a baseline assumption” that GPs are signatories, “so if a GP isn’t, it is usually considered an outlier. It is asked in the majority of LP ESG questionnaires,” says Paula Langton, head of sustainability at placement agent Campbell Lutyens.

Within the top 20, these outliers are Clearlake Capital Group; Hellman and Friedman; Insight Partners; Silver Lake; Clayton, Dubilier & Rice; Leonard Green and Partners; and Francisco Partners.

Should private equity firms sign up? It may help with fundraising efforts. For some investors, such as Allianz Investment Management, being a signatory is a mandatory criterion for GPs. For HESTA, Australia’s AU$68 billion ($45 billion; €44 billion) superannuation fund for health sector workers, a manager’s status as a signatory is usually a requirement for fund managers, although the organisation does not have a formal policy for this.

“It’s becoming more of a minimum standard,” says Jeff Brunton, head of portfolio management at HESTA. “It shows that they’ve made a commitment to integrate responsible investment into their investment process” and that the fund manager’s values align with Hesta’s, Brunton adds.

For others, such as AP6, a SKr67.3 billion ($6 billion; €6 billion) Swedish public pension fund that invests exclusively in private equity, being a signatory “sends a strong signal” about the GP’s commitment to sustainability, “but for us, it is not a requirement”, Anna Follér, head of sustainability at AP6, tells New Private Markets. Both Allianz IM and AP6 are themselves PRI signatories.

For HESTA, which signed up in 2006, it was “a differentiator” several years ago, when fewer fund managers were signatories. But “the fact that most managers are [now] signatories – it’s becoming increasingly a first hurdle for a manager to be considered rather than a differentiation of managers,” says Brunton.

Launched in 2006, among its first signatories were BlackRock (2008), KKR (2009) and EQT (2010). The PRI requires fund manager signatories to confirm that more than half their portfolio is covered by an ESG policy – without stipulating what is in the policy. And before the reporting system was paused in 2020, signatories were assessed by self-reported descriptions on the contents of their ESG and investment policies and processes.

Sustainability efforts in private equity have become both more advanced and more distinct. Now, “investors look for other things too”, says Langton. ESG due diligence questions from LPs “are a lot more focused on climate, diversity and other additional sustainability factors”, says Langton.

Just arrived

But if its utility as a “differentiator” has indeed diminished, per HESTA’s comments, this has not dissuaded private equity heavyweights – in the past couple of years several of the world’s biggest private equity firms have signed up to the PRI.

Thoma Bravo became a signatory this week. The Carlyle Group, Bain Capital and General Atlantic also became signatories this year. Blackstone, Warburg Pincus and Advent International became signatories in 2021. Vista Equity Partners, Apollo Global Management and Ares Management joined the list in 2020.

Notably, some of these firms had already taken significant steps to institutionalise sustainability before becoming signatories. For example, Carlyle appointed a global head of impact in 2019 and began work on industry data standards; Bain launched an impact strategy in 2016; and Blackstone had hired execs to launch an impact strategy in 2020, although the firm ultimately wound it down.

Thoma Bravo had been held back until last month by a lack of resource to meet the PRI’s reporting requirements, the firm’s head of ESG, Donna Riley Bebb, tells New Private Markets. Bebb joined the firm in this role in July 2022.

Thoma Bravo has “been thinking about [signing up] for a long time. [Now that I have] come onboard, I have the bandwidth to actually oversee and drive this process going forward. The reporting is something we have to take on, and we needed somebody to steer that and oversee it and who had the bandwidth.”

“I don’t think there’s ever a wrong time to do the right thing. The more people that are joining and are engaged on this, that’s only a positive thing,” Bebb adds.

Blackstone declined to comment on the timing of its sign-up to the PRI, but a source with knowledge of the firm said it too became a signatory having built up the internal resource to fulfill the reporting requirements.

Another reason for these recent sign-ups, suggested by AP6’s Follér, could be that with mandatory reporting requirements looming from regulators, such as the EU and the US’s Securities and Exchange Commission, firms “realise they will have to do this reporting anyway” and are tooling up for it. Against this regulatory backdrop, completing the PRI’s reporting requirements will seem less of an incremental expense.

Reporting burden

“Actors that have not signed up think a lot about the reporting burden,” said AP6’s Follér. Reporting is optional for a new signatory’s first year, and mandatory thereafter. AP6 found its first reporting cycle “a bit cumbersome” but “a very useful exercise” for identifying key sustainability issues and areas for the pension fund to consider. Reporting became much easier for AP6 the following year, because “we had the basic structure to work off”.

These reporting requirements are cited as a concern by managers New Private Markets speaks to. “It makes us a little uncomfortable to sign up for something after the ground has shifted under the feet of the signatories in the past,” says a partner at a US-headquartered buyout firm that is not a signatory, speaking on condition of anonymity.

“Our view has always been that the PRI is always moving around, so that’s always concerned us,” said a partner at another US-headquartered buyout firm, which is also not a signatory. “It’s much more effective for us to draft our policy based on it – to essentially comply without signing up. There’s no real benefit to us signing up.” This firm has not ruled out signing up to the PRI, however.

Shifting ground

As industry thinking around ESG has developed, the PRI has indeed changed its reporting requirements. In 2012 – when PRI implemented a significant review of its mandatory questionnaires, questions were more focused on firms’ policies, organisational structures, goals and patterns of tackling sustainability issues. Over the next few years, the questionnaire became longer and more detailed and asked for examples. Signatories received scores between A+ and E.

In 2021, the PRI conducted another review. The questionnaire was halved in length and more tailored to asset classes. It also asked signatories to provide evidence of the outcomes of their portfolio-level sustainability efforts and detail of how signatories are measuring and managing these outcomes. A five-star scoring system replaced the A+ to E scores. Alongside with these changes, the PRI introduced a new online reporting platform. The process has been put on hold since 2021, but the PRI expects to resume it in 2023.

The changes in 2021 were “designed to streamline and improve the reporting process as a whole”, Cathrine Armour, the PRI’s chief reporting officer, tells New Private Markets. The PRI attributes the two-year hiatus to technical issues with the online platform.

Armour continues: “While some signatories commented that there were several improvements in the process, it became apparent that technical issues meant that some signatories were not able to submit a full and complete data set. These were only revealed once the tool was operating at scale. As such, the decision was taken to pause reporting in 2022 in order to fully address the full range of feedback we received from signatories and to improve the process going forwards. PRI will be running the reporting process again in 2023.”

Some signatories told New Private Markets they were unhappy with the outcomes- and data-based questions. Several signatories said they did not complete certain sections of the 2021 questionnaire because the relevant data was not available, or they did not have access to the data, even if it had been collected by portfolio companies.

Two firms said they did not complete certain sections because they were afraid they would be scored poorly for it. “[The PRI] filled it with questions [about performance] that no one measures,” the head of ESG at a private equity firm signatory told New Private Markets. “They tried to change the system, and they broke it.”

The PRI says it has heard these concerns and 2023’s reporting framework will address them. Armour said: “We have undertaken a rigorous process to address signatory feedback in the development of the 2023 reporting framework. We know that PRI’s framework for reporting needs to reflect not only the needs of our signatories but also the changing and challenging market landscape they operate within.

“Our aim with the new framework is to deliver a reporting process which helps signatories to drive their own ambitious and effective responsible investment activity. We will be announcing more details in January 2023.”

Do the scores matter?

It is likely to become harder for private equity firms to score highly when reporting resumes in 2023. But does this matter to investors?

For LPs, a GP’s score can be a straightforward differentiator. Scores matter in HESTA’s investment decisions, for example: “When we think about making changes to our manager relationships and line-ups, we look at PRI reporting and manager scores as part of a way we think about the manager due diligence,” says Brunton.

Thoma Bravo’s Bebb sees potential for the PRI’s reporting requirements to resolve private equity’s ESG data challenges. “It is useful for our LPs because it provides standardised, transparent reporting and it gives us a seat at the table and can help shape that discussion [on the reporting requirements going forward],” Bebb tells New Private Markets.

Although other initiatives have entered the fray while the PRI’s reporting requirements went offline – most notably, the CalPERS- and Carlyle-led ESG Data Convergence Initiative – the PRI “is the largest coalition of ESG investors in the world”, says Bebb – so it is uniquely positioned to fill this need. “Having something that’s standard and universal is very important for LPs. We’ve heard that from many of our LPs and we want to be as transparent and helpful as we can for them.”

Going public

Transparency requirements for their scores and responses are another factor holding some fund managers back from signing up. “It’s hard for us to agree to something when we don’t know what the questions are, and we don’t know what’s going to be publicly disclosed,” said the partner from one of the unnamed non-signatory GPs.

KKR, a signatory since 2009, has also struggled with the publication of its scores. In 2019, an unnamed LP threatened to mark the firm as “non-compliant on ESG” if it did not disclose its PRI scores, affiliate publication Responsible Investor reported. KKR’s then-head of sustainable investing, Elizabeth Seeger, told Responsible Investor at the time that although it does not disclose its PRI scores, it offers stakeholders a “dialogue on our assessment findings and our [ESG] plans for the future”.

“The PRI is becoming a ratings agency rather than a forum for self-improvement,” Seeger continued at the time, speaking to Responsible Investor. “The PRI has a complicated task of balancing what can be competing uses of their assessment tool by different signatories. Based on my experience with the assessment exercise, I believe the output could best be used as an improvement roadmap for signatories rather than an investor screening tool.”

Private equity is different

Other interviewees have cited concerns that the PRI’s reporting requirements are not tailored to private equity. One non-signatory New Private Markets spoke to said: “It doesn’t really make sense for a private equity firm to join the same alliance as BlackRock and Vanguard and Fidelity – it’s just so different.” The reports “capture a snapshot in time”, he said, and the PRI’s reporting system “does not recognise that our portfolio is not static. Our portfolio is constantly reshaping and therefore we need to measure success based on what we’re able to do with companies.”

A buyout firm should exercise the private equity ownership model to support companies to transition to more sustainable operations, this partner at the non-signatory firm continued. “Our industry is good at providing capital and additional resources to help businesses through an inflection point or a transition, which is exactly what is needed in ESG.”

For his firm to sign up, the PRI (or any other framework or organisation) would need to “incentivise us to invest in businesses that need to go through that transition and measure success based on executing those transitions”.

Resource library

The PRI is not just the provider of an assessment tool. It also produces a wide range of resources – such as sustainability tools and pathways, guides and research papers – for investors, managers, intermediaries and service providers. It has an ESG due diligence questionnaire template for private equity funds that is widely used by LPs, and last week the PRI released a venture capital version of this template.

Many of these text-based resources are in the public domain, so do not act as an incentive for firms to sign up. “We want it to be accessible to as many people as possible in the industry,” says Peter Dunbar, head of private equity at the PRI.

Being a PRI signatory has other benefits: it offers access to working groups and networking and exchange opportunities – such as one-to-one ‘office hours’ with other experienced sustainability actors in private equity to help new signatories get started.

AP6’s Follér sees the benefits. “It’s not just about the reporting. It’s about sharing and learning and best practice, and developing responsible investment practices,” she says.

Follér is a member of the private equity guidance committee, which has developed ESG due diligence questionnaires, guidance on legal documentation and guidance on how to engage other stakeholders. “Those that have signed up speak a lot more about how useful all of this is” than the challenges of the reporting requirements, Follér adds.

Thoma Bravo’s Bebb agrees: “Access to peers and thought leadership” is the second reason why the firm has just signed up, after providing standardised ESG reports for its LPs. “These are some of the most creative, passionate people in the industry, that are part of the PRI, and we become part of that group. We get to have access to the training, the networking, the workshops, shaping the discussion and at some point being a part of the committees that are determining the rules and reporting requirements for signatories.”

A new landscape

Sixteen years after the organisation’s inception, a signature to the PRI still carries weight among many investors, who view it as an indicator of ESG intent. If not ubiquitous, it is certainly widespread among private equity firms; non-signatories are the outliers among large managers, who continue to turn to it. However, the ESG landscape – in particular around reporting – is changing at a pace, with both regulatory and voluntary frameworks coming online to align investors with managers on data and fund ‘labels’. This is the backdrop against which the PRI needs to stay relevant.

It is well placed to do so, says Dunbar, because of the unique position it holds in the market, combining practical guidance with support for the ecosystem (for example, it hosts and faciliates the work of Initiative Climat International, an influential climate-focused PE working group). “Our continued work across the private equity, venture capital, and private debt spectrum, we believe, is unparalleled and delivers great value to the industry, from those new to responsible investment, to the more sophisticated and complex investors.”