Private equity looks beyond data discussions to the ‘real juice’ of ESG value creation

The private equity industry has made great strides on one of its most pressing ESG challenges: data.

The desire for environmental, social and governance performance data that allows like-for-like comparison between portfolio companies and funds has been a talking point among sustainability professionals for almost as long as the “ESG” initialism has existed.

A question from the floor at last week’s Private Equity International Responsible Investment Forum: Europe this week was ‘Are we really still talking about this?’

We are, and with good reason. Comparable data sets will allow analysts to track correlation between ESG performance and financial outcomes. They will take ESG from the anecdotal to the quantifiable, and move the conversation on once and for all from “is this costing us money, or making it?” to “how do we do this well?”

There is progress to report on this front. When the Sixth Swedish National Pension Fund started to gather portfolio greenhouse gas emissions data in 2015 “very few GPs could share qualitative portfolio company data with us,” said Anna Follér, head of sustainability at the pension. “Since the launch of the EDCI, that has dramatically changed,” she continued, referring to the data convergence initiative which now has 350 LPs and GPs signed up to measure and report ESG data in an aligned way. “Around half of our GPs are EDCI members, so we could definitely see how that possibility to collect data went through the roof.”

Follér was speaking on stage at the forum on one of a number of panels addressing data.

Follér said that when the pension requested emissions data this year in line with the EDCI, the average response rate was three days, with “quite a few responding with the data in a perfect format within the day”. None of the GPs declined to send the data, she added, with only one sending just anonymised data (“completely useless for us, actually”).

“I mean, that’s a huge difference,” Follér said.

ESG data disclosure practice formerly comprised an incongruous hotchpotch of divergent reporting standards and guidelines, but is starting to look more like a cohesive, complementary set of approaches.

Alongside Follér on stage was Abrielle Rosenthal, chief sustainability officer at Towerbrook, a GP and early supporter of EDCI and other frameworks. When asked about the ESG measurement and reporting framework released by industry body Invest Europe, Rosenthal said it was “very complementary” to the other frameworks Towerbrook is using, such as the EDCI.

“That’s the point here,” said Rosenthal. “These frameworks are not one-or-the-other; they are complementary.”

The goal, she added, is that when frameworks asks for a particular metric, they all ask for it in the same way. “As [frameworks] converge, GPs will be able to look – with a lens of materiality – and identify the frameworks that work best for their portfolio. We found Invest Europe a very good tool and easy to use, and [it] added value in our data collection process.”

Tricia Winton, global head of ESG for Bain Capital, also welcomed new frameworks, referencing in particular the recently launched Private Markets Decarbonisation Roadmap (PMDR). “We pressure test against these various frameworks… they bring new angles and new emphasis and they are helpful to push forward our progress and approach, showing how we need to modify or build on it over time,” she said.

Michael Marshall, head of sustainable ownership at pension fund Railpen, added that his organisation is particularly supportive of IFRS S1 and S2, a set of global disclosure frameworks launched this year. “We’ve been using the SASB standards [a predecessor to the IFRS frameworks] for many years when analysing a listed security where we are taking active risk, or a co-investment opportunity in our private markets book.”

“We are very pleased when general partners use that sort of materiality framework for their own ESG analysis or consultants do it on their behalf,” Marshall said. While this is immediately relevant for listed securities, he noted, he suspected it won’t have a significant short term impact on privately held companies.

Next stop: audit

General partners have one eye on a future where ESG data is not just self-reported, but is audited by third parties. “We [take the] view that our ESG metrics are going to sit alongside financial metrics and be audited over time,” said Winton, “We are building to that capability.”

Towerbrook is working on a similar assumption, said Rosenthal: “We are also fully expecting that the market will move to one in which this data is assured over time similarly to financial metrics; so we are building with that in mind.”

One should not assume, however, that the involvement of a third party will necessarily guarantee the quality and consistency of data. Railpen’s Marshall relayed an anecdote whereby an LP peer had been trying to get a handle on its own operational carbon footprint. By using two separate consultancies working on the same underlying data, the pension came up with numbers ranging from 15,000 tons to 24,000 tons per year. “This is the state of play right now,” said Marshall. “We and our general partners are not alone in hopefully improving over time.”

And while investors are now using a common language and toolbox to calculate certain common KPIs, others, like avoided emissions, an important metric in tracking the impact of climate investments, are works in progress. As in other areas of sustainability there are voluntary, industry-led initiatives plotting a way forward. In this case, it is Project Frame, which has over 750 community members collaborating on how to calculate forward-looking emissions data, often referred to as Scope 4. “There’s a lot more to do to really get those standards out there and consistent,” said Matthew Harwood, chief strategy officer at VC firm Climate Investments, during a discussion on energy transition impact investing later in the day.

Scope 4 is an area in need of more standardisation work, because it “is still really tricky and incredibly time consuming if you want to get it right”, agreed Shami Nissan, partner and sustainability head at infrastructure firm Actis.

Beyond crunching the numbers, GPs seem to be looking forward to a time when their energy is focused less on the data itself and more on the outcomes.

“We have to move from a discussion of metrics to more of a focus on outcomes,” said Winton, adding that standardisation is hopefully accelerating this shift. “Instead of looking at how many companies are reporting on employee engagement, what’s much more important is how an industry-leading NPS [net promoter score] is generating performance.

“The real juice is in focusing on the outcomes and linking that to value creation.”