A Carlyle and CalPERS-led group just changed the ESG game

The weight of the institutions involved and the clarity of the approach suggest that the ESG Data Convergence Project could herald the standardisation of ESG data in private equity.

A group of private equity investors and managers have established an ESG data project that could prove transformational.

The ESG Data Convergence Project, led by two private markets heavyweights – the California Public Employees’ Retirement System and Carlyle Group – and comprising other GPs and LPs representing more than $4 trillion, will track and report a standardised set of six ESG metrics.

Investors in private equity have become increasingly hungry for data from managers about the environmental, social and governance performance of their portfolio companies. However, without a unifying standard for either GPs or LPs to follow, the collection and aggregation of ESG data has been arduous and inconsistent. So much so, that the lack of clarity around what data to gather and report has become one of the most pressing and urgent talking points within the sustainable investment community.

This objectives of this initiative are, according to today’s announcement:

  • “to create a critical mass of material, performance-based, comparable ESG data from portfolio companies”;
  • “to allow GPs and portfolio companies to benchmark their current position and accelerate progress toward ESG improvements, which the group believes drives better financial outcomes”;
  • “to enable greater transparency and provide more comparable portfolio information for LPs”.

General partners in the group will track and report six metrics from their underlying portfolio companies, beginning in 2021. “The data will be shared directly with invested LPs by GPs and aggregated into an anonymised benchmark by Boston Consulting Group for this first cycle,” the group said.

The initial metrics cover: scopes 1 and 2 greenhouse gas emissions, renewable energy, board diversity, work-related injuries, net new hires and employee engagement.

Who is in the project?

Limited partners:

AlpInvest Partners, APG, CalPERS, CPP Investments, Employees’ Retirement System of Rhode Island, PGGM, PSP Investments, The Pictet Group, Wellcome Trust

General partners:

Blackstone, Bridgepoint (owner of New Private Market’s parent company PEI Media), Carlyle, CVC, EQT, Permira, and TowerBrook

Marcie Frost, chief executive of CalPERS, said the pension had “found it challenging to effectively measure impact in our private equity portfolio because of the multitude 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,” Frost added. “Managing these risks and opportunities is essential to fulfilling our fiduciary duty to provide retirement security to our two million members. Collaboration between the GP and LP community is the foundation, and we look forward to building out this important work.”

Peter Branner, chief investment officer at APG Asset Management – one of the LP members of the group – said: “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.“

The partnership is open to any GPs and LPs that wish to join and agree to support the principles of the work. Said Kewsong Lee, chief executive of Carlyle, in an emailed statement: “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.”

The big question is whether this becomes “just another framework” competing and over-lapping with others, or whether it provides a unifying, solid foundation on which other investors can build their reporting practice. The scale and influence of the institutions involved (which reads like a roll-call of ESG-forward institutions in PE) and the relatively modest scope of the data set (six metrics) suggests the latter.