In the last few years, and particularly following the advent of the EU’s Sustainable Finance Disclosure Regulation in 2021, GPs have been ramping up their efforts to collect ESG data across their portfolios. But as the quality, scope and granularity of ESG data has grown exponentially, the pressure on managers to gather more, and to do something meaningful with those insights, has also escalated.

Andrew Pitts-Tucker, managing director at Apex ESG Ratings and Advisory, says GPs today are collecting data to answer to four key constituents: regulators, framework signatory reporting bodies, LPs and portfolio companies. GPs can no longer avoid having to run numbers, but they are being asked for different things by different people. 

“There are no longer any GPs that don’t have to report some form of ESG data to their LPs,” says Pitts-Tucker. “Different LPs are asking for different things, collecting different data points, and there hasn’t been a huge conversation about what is relevant and important. That started to change in 2022 with the Data Convergence Project pulling together LPs and GPs so that a consolidation of that data ask can get underway.

“Perhaps the most important reports being generated by the ESG data are the reports that are going back to the companies, identifying areas for improvement and tracking progress.”

Caroline Baker, global lead for private equity at Vistra, agrees that making use of data internally is key for GPs looking at their ESG. “For a lot of GPs, there is a big piece around internal reporting,” she says. “They are generating the data, showing themselves how well they have done, what the gaps are in their data, what commitments they have set out, where they are meeting their commitments and where they need to push their portfolio companies harder. Some are really sophisticated in their use of benchmarks and analysis of where they want to be versus where they are currently. But it can take them a few years to start seeing trends in the data and figuring out their aspirations.”

Many GPs are still struggling simply to extract ESG numbers from their portfolio, says Michael Viehs, a managing director and global head of sustainable investing at outsourced investment office Partners Capital. “There is clearly less ESG information out there for smaller and medium-sized privately held companies. GPs therefore need to encourage and engage their portfolio companies to report on the financially material ESG factors.” 

However, Viehs points out that ESG data should not be collected just for the sake of it. “Materiality is key: GPs should ask themselves which financially material ESG topics are – or might be – affecting the underlying company, which ESG risks might materialise in the future, and whether there are any ESG opportunities that companies can reap. The integration of financially material ESG information into investment decision-making helps investors make better long-term decisions and should therefore be seen as fundamental – a complement to traditional financial analysis.”

On the same page

Efforts to streamline and harmonise the ESG metrics being tracked by GPs are underway, as managers struggle with a barrage of disparate requests. Here, regulation has helped. 

Oliver O’Bryan, an ESG manager in private equity at private markets firm Partners Group, says: “Regulation has been good and bad. It has created a huge amount of work, given the time available and the ambiguity, but the benefit is that at least definitions and data points are starting to become streamlined, and people are starting to understand what is mandatory and what is really important.

“The regulatory side is starting with disclosure and transparency for the client, as we take a step in the long and evolving journey of sustainability reporting. Everyone is being forced to share this data, but it often says nothing about the performance of an indicator simply by reporting it. For us, the data allows us to understand our assets a lot better and see where we have the most work to do.”

The next step will be for the industry to get smarter in prioritising key data points and comparing those across peers. “Readily available ESG data is new to private markets, and is often not shared among industry participants, so it becomes difficult to create benchmarks,” says O’Bryan. “There are a lot of external providers working on that, but for now the focus is on transparency, before we can ultimately move to benchmarks.

“What we have seen from LPs is some initiatives to try to streamline and harmonise these data requests. But you still have LPs coming with their own templates and their own frameworks. We see a huge range of maturities when it comes to data collection, with some LPs that have been doing this for a decade and have stuck with the same frameworks now generating really robust data sets, and others just starting out.”

Data verification

As well as narrowing down the volume of data points to make sure that every measurement has a reason and a scrutiny behind it, there is also a need to better verify the numbers.

Laure Villepelet, head of ESG at Tikehau Capital, says: “We know that a number of ESG data points depend on methodology and approach, so consistency checks are often necessary. In addition to conducting a quantitative assessment, we therefore aim to spend time with portfolio companies to understand their key issues, discuss them with their ESG contacts or management, and work with them to develop the most robust approach.”

Data verification is often a big challenge, says Pitts-Tucker: “It takes people to do that and there are very few GPs with the teams available. It also requires resources to benchmark, but if a company is going to get better at sustainability it needs that full picture at the outset.”

Managers will undoubtedly embrace ever smarter tech tools to address the ESG data challenge. “The future of ESG data is, in my view, likely to be artificial intelligence and machine learning,” says Viehs. “ESG information is so rich and oftentimes inherently qualitative that it is hard to summarise the sustainability performance of a company in one single numerical value. Hence, investors will rely more and more on deep learning technology, natural language processing and other tools to analyse and make sense of the vast amount of qualitative ESG information companies are publishing these days.”