Limited partners are asking for more data than ever on diversity, equity and inclusion metrics, and while larger private equity firms have the internal resources to meet demand, for smaller groups outsourcing could be the way forward.
“There is a lot more happening [on DE&I], as LPs are requiring it on their due diligence questionnaires,” says Hephzi Pemberton, founder of Equality Group, a consulting firm focused on diversity. “A lot of firms are doing more ongoing measurements on an annual basis and are keeping their DE&I data up to date.”
But soon, annual updates will not be enough. A report published this year by Intertrust Group found that more than a quarter of investors expect to have live on-demand information on DE&I in 10 years’ time, while around 30 percent will expect daily updates.
Pemberton says that while some groups are opting to outsource, there are also internal data systems being built – at least by those who can afford it. She adds that progress in this area typically depends on what a fund is already doing around environmental, social and governance factors.
Nearly three-quarters of chief financial officers surveyed by Intertrust said they expect to expand the skill sets of their in-house team by hiring technology expertise, while 61 percent said that they will also seek outsourced expertise in technology to complement the in-house team.
Carlyle, for example, has dedicated its resources to develop its in-house team. Carlyle’s chief DE&I officer, Kara Helander, says that while the firm does most of its work on DE&I internally, it also uses portfolio monitoring software service Chronograph as a tool to automate the collection of information from portfolio companies.
Carlyle also co-led the launch of the ESG Data Convergence Project last year alongside the California Public Employees’ Retirement System. The initiative will see GPs report on six metrics across their portfolio companies, including DE&I-related metrics, to help standardise ESG reporting. Carlyle says it expects responses from over 1,500 private companies this year.
For Chitra Baskar, Intertrust’s chief operating officer and global head of funds and product, fund administrators have an opportunity to provide solutions as demand for data intensifies.
In November, Intertrust launched a new end-to-end data gathering and analytics solution on ESG approaches for private fund managers. The product, which can also be used for DE&I data, supports local currencies and metrics and offers data validation features.
“Funds tend to outsource data collection, so it would increasingly need to become a part of the offering,” says Bashkar. “It’s still growing, but there is definitely an increase in demand.”
For fund managers collecting DE&I data, there are three major questions that service providers can help to answer, according to Andy Pitts-Tucker, managing director at Apex Group ESG Ratings & Advisory: what data should be collected; how can it be gathered and turned into accurate reports; and how can managers act on that information to drive positive change?
“By partnering with a third-party provider, funds can access not only the technology and platforms they require to efficiently collect and analyse data securely, but also the advice and support to help convert this data as the basis for actionable policies and strategies,” says Pitts-Tucker.
He also points out that since the data is related to people’s personal information, it is important to ensure that companies comply with any regulatory requirements when handling them, such as the EU’s General Data Protection Regulation.
For global funds, this can be more challenging, as different jurisdictions have varying rules around what data companies can collect.
“As we have seen with environmental data collection in the private markets and calling out of greenwashing, it is no longer accepted to ‘mark your own homework’”
“Europe has many different sensitivities and cultural differences, and it’s very difficult to ask these questions and to find the right way to ask them,” says Equality Group’s Pemberton. “You can ask as long as it’s voluntary, but the art of it is how you ask and when you ask.”
It is also important to prepare employees on why the data is collected and what will happen to it. “The whole communications piece is very important, and I’ve seen some funds get unstuck with that,” says Pemberton. “Getting a third party helps avoid some pitfalls – it also shows there is a serious commitment being taken: the fund is investing time and resources into doing this properly.”
Working with third parties can also help funds avoid being accused of greenwashing, according to Pitts-Tucker. “As we have seen with environmental data collection in the private markets and calling out of greenwashing, it is no longer accepted to ‘mark your own homework’.
“Fund administrators have an important role to play in ensuring rigorous and independent data verification when it comes to diversity metrics. In addition to providing flexible and intuitive technology platforms to securely collect data, external providers also offer a pool of much sought-after talent and expertise in DE&I and ESG, which would be prohibitively resource-intensive for managers to build in-house.”
On the other side of the equation are LPs, who are looking to gather information on the – often hundreds of – funds they have invested with.
Castle Hall Diligence is a dedicated due diligence company working with around 200 investors to assess the ESG credentials of fund managers. The group acts as a middleman and collects responses from hundreds of funds on behalf of pension plans, sovereign wealth funds and other investors, and tracks the quality of the information.
Chris Addy, Castle Hall’s founder and CEO, says that one of the most challenging aspects of DE&I is that it can be more qualitative than quantitative, which can require a lot of manual processing of information.
“You can’t reduce complex and evolving capabilities to a score,” says Addy. “There is too much focus on gathering the score and one-dimensional information around statistics. We are trying to profile the employee base but we are just as interested to look at the policies and procedures the asset manager has put in place.”
The company has built its own application, called Diligence Hub, which gathers information and runs algorithms to identify risk factors, but a lot of the work is done manually.
Addy says he is able to gather information in the vast majority of cases, with larger managers often having more standardised data. However, a small minority of firms will have their own format of data collection, and an “extremely small minority” does not respond to basic information requests.
While it is becoming more commonplace for funds to provide DE&I data to their investors, there is some information many still will not disclose, such as whether they have ever reached a settlement related to workplace misbehaviour – according to Addy, 39 percent of fund managers on Castle Hall’s database will not respond to that question.
In Pemberton’s opinion, there is more that can be done around inclusion and equity information, with groups needing to figure out how to collect and share meaningful data. This, she says, will be where most of the progress will be made in the future.