The lead private equity director for the US’s largest pension fund has likened unstandardised ESG reporting to valuing companies using differing financial metrics.
If private companies could choose whether to report EBITDA, adjusted net income, free cashflow or operating income as their key profitability metric, “how difficult would it be to assess the relative attractiveness and performance of an individual company”, Yup Kim of the $482 billion California Public Employees’ Retirement System asked delegates on Wednesday at PEI’s Responsible Investment Forum: New York.
Kim was being interviewed by Matthew Schey, senior director at ILPA.
“Imagine if all private equity-backed private companies reported different profitability metrics… it would be virtually impossible to track operating progress on a GP fund and LP portfolio level,” Kim said.
For ESG, he said, the “greatest pain point” is the lack of standardised frameworks. “ESG is a very complex topic, but I think we can make enormous gains by beginning to implement a pragmatic set of metrics that investors can converge on.”
CalPERS has sought to promote ESG standardisation efforts through the ESG Data Convergence Project, which the investor helped launch last September alongside The Carlyle Group. The reporting initiative, which now counts more than 100 participating LPs and GPs representing $8.7 trillion in assets, is collecting data related to six ESG metrics including greenhouse gas emissions, board diversity and employee engagement.
“Having much better visibility across what type of ESG risks and value-creation initiatives GPs are pursuing to generate returns is a critical dimension we’re aiming to track across time,” Kim told the audience.
Kim also discussed the stiff competition for talent among investors, as they bid to hire, motivate and retain skilled professionals.
“What employees value has shifted. Without having the proper culture, priorities and toolkits to make that a competitive advantage, you are at a disadvantage,” Kim said. “Whoever attracts the next generation of top decile of engineers, product managers, marketers, employees and management teams will win the next decade, the next century.”
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