Scheme backed by LPs and GPs representing over US$4 trillion in assets aims to streamline and harmonise ESG reporting.
Over 100 general partners (GPs) and limited partners (LPs) could sign up to a new ESG Data Convergence Project less than a week after it was established.
According to global investment firm Carlyle, a wave of private equity (PE) firms and institutional investors have expressed interest in the project aimed at advancing an initial standardised set of ESG metrics and mechanisms for comparative reporting.
Carlyle and the California Public Employees’ Retirement System (CalPERS) led the collaboration which includes GPs and LPs representing more than US$4 trillion in AUM. The group includes LPs: AlpInvest Partners, APG, CalPERS, CPP Investments, Employees’ Retirement System of Rhode Island, PGGM, PSP Investments, The Pictet Group, Wellcome Trust; and GPs: Blackstone, Bridgepoint Group, Carlyle, CVC, EQT, Permira, and TowerBrook.
The group aims to streamline the private equity industry’s historically fragmented approach to collecting and reporting ESG data in order to create a critical mass of material, performance based, comparable ESG data from portfolio companies.
This will allow GPs and portfolio companies to benchmark their current position and accelerate progress toward ESG improvements, which the group believes drives better financial outcomes. This will also enable greater transparency and provide more comparable portfolio information for LPs.
GPs will track and report six metrics from their underlying portfolio companies, beginning with calendar year 2021. The data will be shared directly with invested LPs by GPs and aggregated into an anonymised benchmark by Boston Consulting Group (BCG) for this first cycle. The initial six metrics are: Scopes 1 and 2 greenhouse gas emissions, renewable energy, board diversity, work-related injuries, net new hires, and employee engagement.
The group plans to meet annually to assess the prior year’s data, and to refine and build on these initial metrics, prioritising materiality. This collaboration is intended to be a long-term mechanism to increase the quality, availability, and comparability of ESG data in private markets.
The recent increase in PE deal flow has raised concerns that the number of firms going private could compromise the efforts of investors to track their ESG performance. But a number of industry initiatives have been launched to support the flow of ESG-related data from PE firms and their portfolio companies to institutional investors.
In July, the Institutional Limited Partners Association (ILPA), which supports the ESG Data Convergence Project, released an ESG Assessment Framework to help LPs evaluate and understand the stages of ESG integration peers are observing among GPs. The Principles for Responsible Investment recently launched a Climate Hub for Private Markets, to provide investors with guidance on how they can support the path to net zero through private investments.
Climate-focused disclosure platform CDP recently launched a pilot programme to increase disclosure from private companies of all sizes, including mid-market and SMEs, and those with high-impact business activity that have historically avoided scrutiny on environmental issues and pressure to decarbonise, said it supported further industry collaboration.
According to Carlyle, the initiative has been received positively across the industry, with many GPs and LPs expressing an interest in participation.
“The response has been amazing. This is a really important industry milestone,” said Brittany Berliner, US Head of Corporate Communications at Carlyle. “Many ESG reporting frameworks have emerged over the past few years, each with various areas of focus, or oriented towards specific stakeholder groups. However, there has historically been a lack of convergence towards an initial core set of ESG metrics for private companies.
“Investors, private equity firms, and their underlying portfolio companies report using one, some, or a portion of several frameworks, resulting in a lack of critical mass of usable data in any single set of ESG metrics across private companies.”
Time to engage
Claire Elsdon, Joint Global Director of Capital Markets at CDP, said there is a need for a streamlined approach for data collection for the private market actors due to the large proportion of SMEs among underlying investee companies. “Disclosure is a journey and it is important that companies of all sizes begin to engage in the process of transition to a 1.5 degree Celsius scenario as a matter of urgency. This begins with consistent, comparable disclosure.”
Elsdon emphasised the importance of aligning with existing frameworks to minimise cost burdens, noting that the CDP had developed a questionnaire for SMEs aligned with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).
“It is essential that we continue to measure progress against the TCFD guidelines, not least because for example, measuring GHG emissions today in isolation without also understanding the ambition of a company in terms of reduction targets only provides a moment in time snapshot rather than a clear pathway for transition, ideally backed by science. While all companies may not be able to answer all of those questions today, given the urgency of the climate crisis and the very real risk to earnings, it is essential that any firm engaging with and indeed financing these SMEs send a clear message that these are key metrics for any sustainable business.”
CalPERS CEO Marcie Frost said the two-million-member US pension scheme had encountered challenges in effectively measuring impact in its private equity portfolio due to the range of frameworks and definitions used by GPs and LPs.
“This initiative simplifies sustainability reporting by using comparable metrics which allow us to gain insight into the investment risks and opportunities in our private markets portfolio. Managing these risks and opportunities is essential to fulfilling our fiduciary duty to provide retirement security to our members. Collaboration between the GP and LP community is the foundation, and we look forward to building out this important work,” she said.
Peter Branner, Chief Investment Officer at APG Asset Management, said it would use the metrics in its engagement with managers.
“While APG’s ambition goes beyond the six metrics identified by the ESG Data Convergence Project, we are excited by the momentum generated, with data collection by PE managers already underway,” Branner said.
Carlyle chief executive Kewsong Lee said the partnership was open to all GPs and LPs which wanted to join and agree to support the principles of the work.
“We welcome leading investors to join because the more we can contribute our data, the more valuable this benchmark will become as we all strive to drive ESG improvements at our companies and generate long-term value together,” he said.