Greenstone attended the recent Responsible Investment Forum in London. Co-hosted with PRI, the Responsible Investment Forum is the longest-running private equity (PE) event focused on bringing together fund managers, institutional investors, and expert advisors to discuss ESG issues across alternative asset classes.
Below we identify four key themes during the event:
1. Value creation is the leading driver for ESG
ESG continues to be high on the agenda for PE markets. Many general partners (GPs) are increasingly subject to higher scrutiny and regulatory compliance in an ever-evolving landscape. There is now much more emphasis on creating value through ESG performance, and a step away from the notion of ‘not doing harm’.
Although PE firms are uniquely placed to realise ESG opportunities as a key value creation driver, the journey can be challenging and complex. The multiplicity of ESG frameworks, and obtaining reliable data to track performance, remain a challenge. However, as the industry matures, tools are being developed and ‘preferred’ frameworks are being adopted to align expectations.
GPs can protect and create long-term value by enhancing value levers and integrating ESG into their value creation plans. Measuring performance against targets and building the knowledge and technology to support and improve those KPIs are key to the success, and sustaining asset value.
2. Decarbonisation strategy – setting a clear road map and targets
A growing number of firms are developing decarbonisation strategies and many have set net-zero commitments and science-based targets across their portfolio. For these firms, defining a decarbonisation strategy is the most important starting point. Such a strategy typically involves setting out the overarching ambition and articulating carbon reduction targets, which can be broken down into short- and long-term measures. It is critical to align these targets with the firm’s overall ESG and fund strategy, serving as a guide for limited partners (LPS) and the investment team.
However, setting realistic and achievable targets requires accurate measurement of primary data. This requires a streamlined approach to data collection and analysis, as well as portfolio engagement and education. PE firms need to truly engage with their portfolio companies’ management teams and set a clear roadmap. With active engagement at portfolio level, LPs can ensure that these portfolio companies feel part of their investor’s decarbonisation journey and understand what is expected of them year-on-year.
3. Value of real data
Accurate and reliable ESG data is crucial to ensuring firms achieve their targets and create value. This not only relates to decarbonisation and the need for accurate emissions data, but is also true for the entire ESG spectrum. Primary data, sourced directly from portfolio companies, is how reliable value creation can be achieved. Anything else: secondary, or tertiary publicly available data, won’t stand up to scrutiny when it comes to monitoring the progress of targets and performance over time.
To report robust and relevant data, LPs need to consider implementing a data strategy that future-proofs their reporting objectives. Embedding a data strategy will enable organisations to define a clear path for data management, facilitate reporting resilience, engage stakeholders, embrace technology and balance short- and long-term reporting effectively.
As with any data request, it is essential to communicate what is required clearly but also expand on the when, how and why. Portfolio companies will look to investors for guidance on what is required today, but they also need to understand the context of the broader journey. For many privately held companies, they may not have been required to report on environmental or carbon data previously and as such, an educational element to their engagement is important.
4. Progress over perfection
A challenge within the PE industry is the concept of letting perfection get in the way of progress. Stakeholders need to understand that perfection isn’t achieved overnight.
ESG data is a great starting point and it’s important to have a baseline in order to monitor progress but we’re already seeing signs of ‘greenhushing’ where companies choose to keep their efforts quiet for fear of being accused of greenwashing. While there is a place for blatant greenwashing being exposed, more needs to be done to encourage companies to do their best to improve.
ESG and sustainability reporting is a journey and the key to success is measurement of progress and stakeholder buy-in. CEOs and Boards need to be genuinely committed to the goals and need to be educated and informed at every step of the way.
Greenstone and ESG data collection for Private Equity
ESG software is the obvious way to streamline the ESG data collection, questionnaire distribution and management process. Investors are looking for purpose-built ESG software platforms to collect, track and analyse data and material ESG KPIs from their portfolios on an ongoing basis.
Greenstone has been providing sustainability and ESG software solutions for 15+ years. Through its award-winning InvestorPortal software solution, focused on the collection, management and analysis of ESG and carbon data across an investment portfolio, Greenstone is enabling global PE firms to measure the ESG and carbon impact of their portfolios.
Greenstone’s InvestorPortal is a purpose-built responsible investing solution that provides centralised analysis of ESG data at portfolio, fund and portfolio company level. As well as simplifying the collection, management and analysis of standard and proprietary ESG data and documents, InvestorPortal enables location-based GHG emissions calculation, customised scoring and ratings and portfolio engagement.