How do you expect the industry’s take-up of ESG-related tech and data tools to develop?

Ellen de Kreij, lead adviser of the ESG practice at Apax Partners
Caroline Löfgren, lead sustainability officer at Hg
Carmela Mondino, head of ESG and sustainability at Partners Group
Elizabeth Seeger, managing director of sustainable investing at KKR

Ellen de Kreij: The pace of the adaptation of data solutions is rapidly accelerating. Any firm that is not moving away from Microsoft Excel sheets today will find it very hard to catch up in future years. It is imperative that companies held in private market portfolios adopt a similar approach to ESG data-gathering through technology solutions as public market companies. In the public markets you can already see the full integration of financial and non-financial data in reporting. It enables better decision-making and informs stakeholders about areas of ESG materiality and its effect on value.

Caroline Löfgren: There will be a shift towards streamlining and standardising ESG standards, and platforms will support this. There will be continued focus on tools to measure Scope 3 emissions especially. Equally, carbon emissions reporting will shift to real-time as tools connect into ERP systems. We will also see non-ESG-focused software systems looking to provide ESG-related services, such as HR systems offering gender pay gap reporting. This is a positive change as it helps embed sustainability into business-as-usual, rather than a siloed process.

Carmela Mondino: There will hopefully be greater take-up of ESG-related tech and data tools, as these are important for the collection of robust and meaningful data. From my side, I hope there is also some consolidation among different providers. I receive at least two service provider requests a week to discuss their offering in the space and it is difficult to manage. I see the opportunity, but I hope one or two winners emerge to make the landscape simpler.

Elizabeth Seeger: We believe that the demand and need for ESG reporting will only continue to grow as disclosure requirements and regulations evolve, and investors continue to push for even more transparency around ESG risks and opportunities. There is no way to achieve this without solutions that enable scale and consistency, so technology will play a critical role in the collection and analysis of this data and we expect to see an increased uptake of new tools in coming years.

How has the private equity industry’s approach to ESG data, as well as the tools to manage and make use of that data, evolved over the course of your career?

EdK: The industry has come a long way in how it approaches ESG data. For many years, the industry largely relied on Excel spreadsheets to gather and report on ESG KPIs. This system was clunky and often led to duplicated efforts, and with limited ability to share and analyse data effectively.

However, over the years there has been a shift towards more sophisticated systems – in the case of Apax, [we adopted] a data lake system to better capture data beyond financial metrics.

For us, the drive to implement a more comprehensive data platform has mainly come from the desire to future-proof portfolio companies by helping them use tech to better capture key metrics for value creation, including ESG data. Once the portfolio companies have systems in place that allow for the effective collection of ESG KPIs, we can better extract the data we need and the data our LPs and regulators ask for.

CL: I’ve seen a vast increase in ESG reporting platforms on the market, in response to an increasing level of commitments to ESG targets set by businesses and regulators. There is also significant demand for consultants, especially in the carbon accounting space, to the point where experts are inundated and cannot support every business. As a result, businesses need reliable tools to help assess their progress. There have been accelerated efforts in the past year to standardise ESG data and this is a very positive change that will help everybody.

CM: We have gone from ESG data being nice-to-have to a regulatory requirement that informs an investor’s manager selection, just as with financial data. In that context, the tools used, the robustness of data collection processes, and the assurance provided now need to meet new quality standards, and companies won’t be ready for a while. At Partners Group, we are working with our portfolio companies to get them ready ahead of time, but it is a long, intense process.

ES: We’ve seen a proliferation in ESG data and reporting platforms over the past decade. For example, 10 years ago, a company that wanted to understand its diversity profile would rely on a handful of basic and manually sourced metrics around workforce composition. Today, that same company would likely have access to tools that allow for deeper analysis of many more data points, including attrition and promotion rates, as well as employee survey feedback by demographic.

The number of ESG-focused consultancies and data solutions providers has also increased, and many of those companies are evolving their offerings to cover a broader range of ESG data needs. For example, one of our portfolio companies, ERM, recently launched an AI-enabled ESG rating platform designed to be used as an early-stage diligence tool for private credit investors.

How can sponsors harness technology to assess ESG risks and opportunities, and to improve ESG processes?

EdK: Private equity firms demand a large amount of data from portfolio companies – financial, operational and ESG. Technology can significantly reduce the burden on portfolio companies. At the same time, it can increase the ability of the companies and their sponsors to extract and assess ESG information more effectively.

At Apax, we have built a comprehensive data analytics platform that combines multiple portfolio company data sources, including all 130 ESG metrics. This dataset is used to identify value-creation opportunities as well as recognise risks early on. The data is also fully available to LPs in the Apax funds who can create bespoke data exports to fit their individual needs, such as templated ESG reports or SFDR reports, and thus reduce the burden on both sponsors and portfolio companies.

CL: There is an increasing number of technologies helping to assess ESG risks and opportunities. Some have an outside-in approach by assessing public data, often using data scraping and AI, and some are questionnaire-based. Given that there isn’t yet one assessment criteria applied across the PE industry, there is not yet one technology universally used by all. For Hg, some of the most useful technology we deploy is technology that helps to simplify data gathering and assessment for our 40-plus portfolio companies.

CM: Technology can be deployed in various ways. AI can be used to both identify ESG topics that are relevant to different stakeholders and to source ESG news about portfolio companies.

This enables sponsors to have transparency into what stakeholders expect and visibility on the positive or negative press coverage of an asset. Software can also be used to better track ESG data or risk mitigation. If portfolio companies already use enterprise software to track suppliers, why not use it to track ESG performance too?

ES: Thoughtful collection, measurement and analysis of ESG data is a key focus for us and an area where we think technology can play an especially meaningful role. We want to be able to measure ESG risks and opportunities just as we would (and alongside) financial performance, by determining the right set of meaningful indicators and then using them to measure and monitor portfolio companies’ performance over time.

Technology can help streamline the collection of this data and enable us to identify patterns and trends that can inform our efforts to proactively manage ESG issues across our portfolio.

We also find that using technology in our diligence process can help us gain deeper insights into the ESG risk profiles of prospective investments and make previously manual processes such as background checks faster, more thorough and more efficient.