Last year, private equity firm the Carlyle Group and pension fund the California Public Employees Retirement System (CalPERS) announced what could become a game changer for the private equity industry. The ESG Data Convergence Initiative, or EDCI, seeks to standardize ESG reporting for general partners (GPs) by creating a single framework for them to follow. The aim is to generate a critical mass of comparable information on how GPs’ portfolio companies are performing on ESG relative to each other, as well as to promote greater reporting transparency for limited partners (LPs). The data will be aggregated into an anonymized benchmark by the Boston Consulting Group (BCG).
Thus far, 59 leading LPs and 121 GPs have agreed to participate in the project, or perhaps what at this point one can termed an experiment, that together represent over $8 trillion in assets under management.
If successful, EDCI would be a breakthrough for the industry. Harmonizing ESG disclosures for private markets has conventionally been a gap in the financial market and is essential for sustainability efforts to be credible. In this case, the very investors demanding ESG are setting the parameters of what that means to them, and benchmarking that data to produce an overall picture of the ESG health of the industry.
On the other hand, EDCI does not (so far) provide guidance on how companies can best produce this data. What its benefits will be for GPs, who must now take on an additional reporting burden, will become clearer in the fullness of time.
ESGTree has had the privilege of automating the EDCI framework for its clients to ease this reporting burden. In the process, we have learned three key lessons about implementing the EDCI framework and the significance of it:
EDCI pulls together the most salient data points from already existing ESG frameworks, such as carbon emissions, renewable energy and board diversity. However, this framework cannot be expected to cover all the points that non-participating LPs may require. In our experience automating the EDCI framework, we have, for example, built in add-ons like detailed diversity metrics in order to satisfy the particular demands of our clients’ ESG reporting. The experience has taught us that while EDCI is a significant step in the right direction, it might need to ramp up metrics in certain trending areas like diversity, equity and inclusion, as other LPs will have requirements beyond the framework’s six categories and 17 indicators.
EDCI is the brainchild of some of the biggest players in the private equity field. These players are converging around a set of core metrics that are critical to them as investors and sharing that data amongst each other for benchmarking purposes. Given that this framework is coming from within the industry itself, and supported by the influential Institutional Limited Partners Association (ILPA), there is an automatic push among GPs to adopt it. Only in its first year, EDCI has the weight of around $9 trillion of assets under management behind it.
Before investing too much time into EDCI, GPs want to know: how does this data help us? Will more indicators be added to EDCI? Will this data help us raise money in the future? Will EDCI advise their GPs on what technology tools to use to better report this data? At the moment, GPs are being exposed to large data sets and much of this complicated reporting is handled manually.
Only time will be able to answer these questions sufficiently as the initiative unfolds. As EDCI gathers a critical mass of data for benchmarking, LPs will finally be able to compare apples to apples in an area that has heretofore been characterized by fractured data and unreliable ESG ratings.
Fortunately, the EDCI framework deliberately draws from existing ESG standards to minimize the reporting burden on GPs to the extent possible. By prioritizing metrics that investors and LPs are already asking for, these metrics should become standardized and drive disclosure convergence in the industry to lessen the reporting burden in the long run.
While GPs are used to disclosing financial data, reporting non-financial data is still a relatively new practice, one that is increasingly difficult to tackle manually, especially considering differing LP requirements. We strongly advise private equity firms to partner with cloud-based, customizable platforms to meet and map all their data requirements in one place without having to devote inordinate amounts of time and manpower to the process.
ESGTree provides best–in-class ESG data management solutions geared towards private investors. Built around customizable metrics and user experiences, our ESG reporting tools are purpose made for both seasoned ESG managers and those entering the world of ESG for the first time. We strongly believe that ESG can and should be made a value creation endeavor rather than a reporting burden.