As the quest for sustainability continues to dominate political and popular discourse, institutional investors are clamouring for the ESG data they require to fulfil their own sustainability goals and those of their stakeholders.

However, a sprawling mass of disparate frameworks and ratings bodies has meant a lack of any single, unifying standard. Data collection and aggregation have therefore been inconsistent and arduous, and their usefulness undermined.

“To realise our vision of embedding ESG as an integrated investment objective, we need to be able to measure and assess ESG performance across funds and over time,” says Keren Raz, senior responsible investment manager at Dutch pension giant APG Asset Management.

Julia Jaskólska, lead for ESG and co-investments at California Public Employees’ Retirement System, agrees. “The private equity industry lacks standardised, performance-based ESG data from private companies, despite a proliferation of ESG frameworks. That prevents allocators from being able to track ESG factors across their broader portfolios,” she says. “While ESG is a complex topic, we believe having a straightforward set of metrics, reported in a consistent manner, would be a tremendous improvement over the status quo.”

Jaskólska explains that legacy frameworks lack critical mass, which prevents comparisons across metrics and burdens companies and GPs with a “dizzying amount” of customised ESG template requests: “Other challenges include tension between materiality by sector versus the broader industry; low disclosure rates and data quality for the performance data that does exist; and a high level of sophistication, with frameworks sometimes including over 100 definition booklets, making it impractical for privately-held companies with few resources to implement.”

It is not only LPs that have been feeling the frustration as clear intentions are marred by an obscure process. GPs have been struggling to co-ordinate disparate data demands and a lack of any clear industry consensus. “There are so many metrics and frameworks out there and different data that could potentially be collected and passed on to shareholders,” says Chloë Sanders, head of ESG at CVC Capital Partners.

“The key is determining what is the most material and relevant. Investors want this data. But they also want to be able to process it. Without regularity and comparability, it is difficult to make the data useful.”

In September, a group of private equity investors and managers representing more than $4 trillion in assets under management came together to agree on a set of six standardised metrics around ESG. The initiative, known as the ESG Data Convergence Project, is being spearheaded by CalPERS and Carlyle and is designed to provide greater clarity for LPs and to allow GPs and portfolio companies to assess their current position and accelerate progress.

The six metrics selected cover Scope 1 and 2 greenhouse gas emissions, renewable energy, board diversity, work-related injuries, net new hires and employee engagement. Initial participants include LPs CalPERS, AlpInvest Partners, APG, CPP Investments, Employees’ Retirement System of Rhode Island, PGGM, PSP Investments, The Pictet Group and Wellcome Trust. GPs include Carlyle, Blackstone, Bridgepoint (owner of Private Equity International’s parent company PEI Media), CVC, EQT, Permira and TowerBrook.

35%
Private funds with a highly or somewhat automated ESG data gathering process. Source: Private Funds CFO’s Private Funds Leaders Survey 2021

81%
GPs that strongly or somewhat agree that LPs are satisfied with the quality of their firm’s ESG/sustainability reporting. Source: PwC Global AWM Market Research Centre

32%
LPs that cite metrics, measurement and reporting as areas in which GPs are struggling with ESG matters. Source: Capstone ESG Survey 2021

“By coming to the table together as asset owners and asset managers, we are building a foundation for quantitative performance-based reporting,” says Raz. “We are excited by how many GPs are signing on and expect to see it help drive more visible progress on ESG in the industry.”

Of course, the danger is that this new initiative simply adds to the noise – that it becomes yet another framework on top of an already convoluted system of guidelines and metrics. But the project has been created with longevity in mind. Not only has it been endorsed by some of the world’s most influential private equity brands, but the scope of the data set has been kept deliberately modest to ensure it is meaningful and manageable and can serve as a solid foundation for the future.

“Within this initiative, we recognised that we needed to start simply, with KPIs that companies can comfortably collect and that are relevant to most,” says Sanders. “We didn’t want this to become an unnecessarily bureaucratic exercise but rather something that was useful to the companies, useful for us and informative for our LPs.”

It has been important to ensure that the data collected is credible and accurate. The spectre of greenwashing looms over the burgeoning ESG movement. Furthermore, the expectation is that this data will ultimately need to be assured by the Big Four accounting firms and similar organisations, as regulation, particularly out of the EU, comes down the line. The focus has therefore been on quality, not quantity.

“It is important to make sure we are adequately engaged with companies on these topics and that those companies have the right processes in place to collect this data,” says Sanders. “That way, we can be confident the data we are aggregating is accurate and tells the full story.”

Indeed, Sanders believes that investors are sometimes less interested in the data itself, and more in the GP’s ability to manage ESG issues. “They get some reassurance from the data collection process itself because they recognise that means we have a regular and open dialogue with that business on ESG.”

Building benchmarks

For data to tell the whole story, however, it cannot exist in a vacuum. Comparability is key. In addition to providing a framework for LP reporting, the data produced through this project will also be aggregated into an anonymised benchmark by Boston Consulting Group.

“Everyone has a rough idea of what good looks like for each KPI, but until we have the ability to benchmark by sector, that data doesn’t completely come alive,” says Sanders. “To be truly effective, organisations also need the ability to look beyond private equity-held businesses to build a more global consensus on what good looks like in each of these areas.”

Until that consensus is reached, the potential for greenwashing remains. Only then, therefore, will it be time to consider expanding the range of KPIs that are tracked. Furthermore, any expansion will not be without its challenges. Incorporating metrics that are less relevant to some industries than others – such as waste and water, for example – would entail a new level of complexity. The metrics would need to be sliced and diced, with some metrics mandated for particular sectors but not others.

Meanwhile, it seems likely targets will prove an important complement to benchmarks. “Targets provide another way in which companies can frame their ambitions and demonstrate the progress they have made against those goals,” says Sanders.

“APG’s ambition extends beyond the six metrics,” says Raz. “We want to see GPs set meaningful ESG targets and provide transparency on progress.”

She adds that GPs that were early to collect performance data have already begun setting ESG targets for their portfolios. “This year, in particular, GPs have made real commitments to address climate change by establishing firm-wide, science-based targets,” Raz says.

“Ultimately, we would like to reach a place where reporting ESG performance is similar to financial reporting. We would look for that reporting to disclose where the GP has or has not yet made progress in improving ESG performance. The industry has begun shifting away from anecdotal highlights towards systematic disclosure of ESG performance metrics and targets, which is strengthening transparency.”

Although starting small may be the sensible way to build an achievable and meaningful global ESG framework, it seems likely that, before long, LPs will be demanding more. APG, for example, is already hungry for information on impact and is encouraging GPs, such as those invested in healthcare, to measure real-world sustainability outcomes.

“We are seeing some GPs explore impact reporting for relevant portfolio companies, which we view as a leading practice,” Raz says.

Yet perhaps the most significant way in which the impact of the ESG Data Convergence Project can be magnified is through increased adoption. The project remains open to any manager willing to embrace its principles, and Raz is confident that uptake will grow: “We see the GPs who are embracing the ESG Data Convergence Project as taking an important step forward, including the seven founding GPs, led by Carlyle, who piloted the concept in their portfolios. We have also had discussions with private credit investors who are interested in taking part, which will help drive further adoption and innovation.”

Jaskólska adds: “We have not spoken to a single GP who has not been thinking about ESG and was not doing something about it. And the reception we have seen to our initiative shows that GPs are ready and willing to step up to the plate. Furthermore, we are optimistic that progress in integrating ESG factors can be made much faster than in public markets, once appropriate metrics are in place, given the ownership and governance models in private equity.

Jaskólska says CalPERS’ goal is to promote data that is quantifiable and comparable across companies, managers and industries; that is longitudinal, meaning performance improvement can be tracked over time; that is easy and transparent to report on, and that serves as a common foundation between stakeholders at various points of their ESG journeys, bringing small and big players together.

“We believe this type of data will bring greater clarity to the ESG performance of companies, which will allow the industry to make better investment decisions and, most importantly, create value during the hold period,” she says.

“We believe this approach will also reduce the reporting burden on portfolio companies and GPs, who currently receive multiple ESG requests. Only two months since launch, the number of GPs and LPs who joined truly exceeded our expectations – we now have the critical mass to make significant progress towards streamlining ESG reporting.

ESG data tools

‘Data is essential for any good decision-making process and technology is key to gathering it,’ says Carmela Mondino, head of ESG and sustainability at Partners Group.

The private markets firm deploys technology at two different levels – the portfolio and the company level – in order to collect and manage ESG data.

“Firstly, we use technology to gather data on our portfolio’s ESG performance,” Mondino explains. “To do this, we developed Primera Insight, an artificial intelligence tool that screens for ESG news about our investments. The tool helps us to identify potential issues so that we can engage where needed. The tool we use to gather ESG data is also the same one we use for financial data and we have set an assurance journey for our companies to increase the number of ESG data points that are audited. The ultimate goal is not only reporting but actually analysing our portfolio ESG data.”

At the portfolio company level, meanwhile, individual solutions are emerging depending on the industries and geographies in which businesses operate, but there are no global solutions yet. For example, there are resource management tools for properties, fleets and food waste, which are helpful but which only see part of the picture.

“More holistically, software providers such as SAP now offer sustainability solutions, where data on suppliers also includes ESG metrics,” Mondino says. “Many new solutions rely on companies having the right data to begin with, which takes time. However, as ESG reporting is further formalised, it is only natural for companies to move in this direction.”