Explore how General Partners (GPs) in mid-market Private Equity (PE) firms can operationalize ESG integration by investing in ESG resources. Part 4 of our Critical Success Factors Series outlines the importance of building internal ESG capacity and utilizing technology for efficient sustainability data collection and reporting. Discover the best practices for selecting ESG reporting platforms to meet investor and regulatory demands.
The Private Equity (PE) market has seen greater adoption of Environment, Social, & Governance (ESG) in the past four years than ever before. Factors such as changing investor priorities and rising pressure from regulators have fueled this shift and, while the tide has not unilaterally turned, sustainability is no longer a fringe concern. In this article for GPs, we address the two major ESG pain points experienced by Mid-Market PE firms, namely: Choosing which ESG metrics to prioritize and report at all levels, and how to collect complete, consistent, and reliable ESG data
We’ve also embedded an interactive decision-tree tool to help GPs determine which regulations and standards to consider, given their firm’s and portfolio companies’(PortCos)’ geographies and investor data requests.
Discover how a robust ESG integration strategy can help General Partners (GPs) stay competitive by meeting Limited Partner Due Diligence Questionnaire (DDQ) requirements and regulatory demands. This article outlines essential steps for building an effective ESG policy, assessing materiality, and choosing relevant metrics to enhance risk management and value creation in private equity
Building a Robust ESG Integration Strategy & ESG Policy
What Can You Do?
Step 1. Have a Stakeholder-Led ESG Policy Development Process
Step 2. Choose the Right Metrics & Sustainability Frameworks via PE Materiality Considerations
The Private Equity (PE) Market has seen greater adoption for Environment, Social, & Governance (ESG) in these past 4 years than ever before. Today, PE firms are highly motivated to integrate ESG considerations at the firm & portfolio company (PortCo) levels, primarily because of:
Factor 1: Investor (LP) Priorities – ESG Reporting & ESG Integration:
What the Market has Shown Us:
GPs globally are reporting a rise in Limited Partner (LP) requests for ESG data in Due Diligence Questionnaires (DDQs) as it provides crucial insight into how a company is responding to emerging societal and climate risks.
According to a report from the Principles for Responsible Investment (PRI), over 80% of Private Equity Investors (i.e. LPs) now consider ESG factors central to their investment decisions; in 2021 alone, half of the total fundraising flowed into firms with formal ESG policies, underscoring its growing importance in private markets. In fact, our experience with PE clients has confirmed that LPs are now applying sophisticated scoring mechanisms to score current & potential fund manager’s performance on ESG, further influencing future fundraising allocations.
GPs are now seeing entire acquisitions fall through because the PortCo that they were exiting from did not have an ESG Policy at par with market standards. The fact that more than 70% of mergers and acquisitions (M&A) leaders (Deloitte) and 93% of LPs (Bain) report withdrawing from potential acquisition deals over ESG and sustainability concerns, further substantiates this.
In some cases, LPs are even placing ESG data collection conditions on their investment commitments, leaving GPs with no choice but to comply. Our PE clients are sharing that a frequent LP requirement during fundraising is the commitment for portfolio level ESG data collection by the GP.
According to a PwC Survey, LPs are willing to absorb between 5% and 9% in management fees if there are quality improvements in their GPs’ ESG data reporting practices. ‘Quality improvements’ encompass: 1) improvements in a PE firms’ and its PortCos’ data coverage & data accuracy, 2) access to trends & visualizations for analysis at both the firm and PortCo levels, and 3) benchmarked ESG data to evaluate performance against a set sustainability metrics relative to peers.
Explore the key updates and implications of the IFRS S1 and S2 sustainability disclosure standards introduced by the ISSB on June 26, 2023. This comprehensive article discusses how these new standards, which integrate TCFD and SASB frameworks, are transforming corporate sustainability reporting and influencing both voluntary and mandatory reporting regimes. Learn about stakeholder feedback, the adoption process across jurisdictions, and upcoming ISSB standards on biodiversity and human capital. Prepare your organization for the challenges of compliance and data collection in this new era of sustainability reporting
Discover the transformative impact of California’s SB 253, the groundbreaking Climate Corporate Data Accountability Act signed into law in October 2023. This landmark legislation mandates that companies with over $1 billion in revenue disclose greenhouse gas emissions in line with GHG Protocol standards. Explore the implications for ESG reporting, compliance challenges, and how this law sets a precedent for corporate transparency in North America. Learn how ESGTree’s innovative solutions, including a Carbon Calculator and automated reporting tools, can help organizations navigate this new regulatory landscape and enhance their sustainability efforts.
When the European Union’s Sustainable Finance Disclosure Regulation (SFDR) came into force in March 2021, it signalled to the world that the EU was ready to take a global lead on ESG reporting and sustainable finance.The move impacted all financial market participants and financial advisors based within the EU. Along with the European Green Deal (which aims to see the bloc carbon neutral by 2050), and the EU’s “green taxonomy” (an industry-based classification system of what can and cannot be marketed as a sustainable product), a potent mix of regulatory mechanisms is set to usher Europe towards an economy in line with the Paris Agreement and the United Nations Sustainable Development Goals (SDGs).
The CSRD targets financial and non-financial companies covered by the Accounting Directive and the Transparency Directive, and falling into the following categories:
The United States Securities and Exchange Commission (SEC) is poised to release its highly anticipated climate-related disclosure rules for public US companies – a ruling that has been in the making for over a year.
Originally published in March 2022, the SEC proposed that all publicly listed US companies be mandated to report their climate data in alignment with reporting recommendations from the Taskforce on Climate-related Financial Disclosures (TCFD).
When the proposal was then opened for public comment, the SEC received over 3,400 letters, significantly more than it customarily does when seeking public input.
While the SEC ruling applies to public companies, given the current global regulatory environment, along with calls for greater scrutiny of ESG claims within the private equity industry, it is only a matter of time before similar climate considerations be asked of private funds. Moreover, although the proposal will almost certainly face some measure of legal challenges, this will likely not deter 98% of companies from implementing climate reporting, according to a PricewaterhouseCoopers survey of 300 senior executives at US public companies with at least $500 million in revenues
The United Kingdom now mandates TCFD-aligned reporting requirements for the private sector. The United States Securities and Exchange Commission has proposed requiring publicly traded US companies
