What gets measured, gets managed, as the adage goes. For the private equity industry, disparate approaches to the assessment and tracking of ESG considerations have so far limited the movement’s efficacy and impact.

According to a 2021 survey by Capstone Partners, almost a third of LP respondents cite ESG metrics, measurement and reporting as matters GPs struggle with. The challenge has often been how to align around targets and measurement systems in such a way that provides meaningful and comparable data points that set the foundation for sustained action on ESG.

Creating standardised frameworks that simplify data collection and reporting, and which are fit for purpose for managers and their investors, is not a straightforward task. There are nuances to the private equity ownership model that mean broader cross-sector initiatives, such as those around carbon emissions reduction, to name but one example, may need to be carefully considered.

As the industry’s approach to ESG continues to mature, stakeholders are increasingly collaborating on initiatives that will help the market as a whole to develop and coalesce around best practices, targets and measurement frameworks upon which they can build.

A notable example is the ESG Data Convergence Project, launched last year by a group of prominent LPs and GPs representing $4 trillion in assets under management. The project, led by the California Public Employees’ Retirement System and Carlyle Group, aims to “streamline the private equity industry’s historically fragmented approach to collecting and reporting ESG data in order to create a critical mass of material, performance-based, comparable ESG data from portfolio companies”.

To do so, participating GPs will track and report on six metrics across their portfolio companies, including Scope 1 and 2 greenhouse gas emissions, renewable energy, board diversity, work-related injuries, net new hires and employee engagement. This data will then be aggregated into an anonymised benchmark by Boston Consulting Group.

This project is but one of the ways the asset class is becoming more collaborative around ESG. In November, the Science Based Targets initiative – a partnership between the UN and various non-government organisations – published tailored guidance for the private equity industry to facilitate the adoption of targets that align with the goals of the Paris Agreement. The advice was supported by Initiative Climate International – a sustainability-oriented community of more than 130 private equity investors – as well as the UN-backed Principles for Responsible Investment.

Their endorsement reflects private equity’s rising awareness of the need for decarbonisation measures and climate risk mitigation, with last year’s COP26 also helping to push global warming up the agenda.

“Everyone has a role to play in decarbonisation and – if the ambition is to reach net zero – you really can’t ignore private equity, given the scale and scope of the industry’s investments,” Adam Black, head of ESG and sustainability at Coller Capital, tells Private Equity International.

Despite the challenges involved in standardising certain ESG processes, there certainly appears to be conviction among GPs and LPs to accelerate progress on this issue. Their combined efforts could have a substantial impact.

Stay tuned for more coverage of the industry’s evolving approach to ESG in PEI’s Responsible Investment Special, coming next week.