Privacy – the roadblock to private equity ESG

The rise of ESG is a fundamental shift sweeping the investment management industry, but given its requirements for transparency, how is the notoriously opaque private equity industry keeping up?

On paper, private equity is naturally well aligned with ESG goals given the long time horizons of underlying investors, and higher degree of influence and engagement than is seen in many other asset classes. A 2021 PwC study found that 56% of private equity firms turned down a potential investment on ESG grounds and 56% discuss ESG as part of executive board agenda more than once a year. This shows ESG considerations are being integrated into the decision-making process from an investment perspective. Data has however become fundamental to firms demonstrating their commitment to ESG, the availability and quality of which in the private equity sector is not nearly as abundant as it is in the public markets.

The number of data points required to report on has increased over the last two decades, surging in recent years. Originally driven by investor sustainability initiatives, requiring reporting in line with set frameworks or principals, such as UN PRI or the SDGs. Now regulators have weighed in, with the EU leading the charge by introducing the SFDR as part of the EU Action Plan which requires reporting on the first ever set of prescribed environmental and social metrics.

Across public and private markets, many investment firms are struggling to obtain data and to find the time, staff or specialist knowledge required to report on these niche data sets. As a result, outsourcing to third party data providers, such as MSCI and Sustainalytics, has become prolific in the public markets landscape. Given the information is publicly available providers can employ quantitative techniques and AI to efficiently source the required data and have less reliance on outreach to the target companies to obtain the data. Although, their business models have not extended to coverage of private equity to the same degree, leaving the onus on many firms investing in private equity to go through the labour-intensive process of reaching out to portfolio companies to obtain the data directly.

Quality of data is also a big concern: one recent Sionic survey of asset owners found over half identified poor quality reporting from their asset managers a key issue. This follows the trend that owners are increasingly engaging their managers on sustainable investment. They are looking for greater levels of engagement on ESG issues and reporting, in addition to managers having better documented policies and investment processes.

Clearly this is a fast-developing theme within the industry and the availability of data and solutions is evolving, however the onus remains on firms investing in private equity to ensure they are moving forward with meeting their investors’ and regulators’ increasingly demanding requirements.

In order to do this, firms investing in private equity must ensure they:

  • have the necessary expertise and the right processes to extract the right data from their portfolio companies and report on it in a way that is meaningful to their clients
  • have a data platform capable of aggregating and synthesising this information
  • have the appropriate resourcing in place to deal with the increase in ESG-related investor requests
  • appropriately document their ESG practices.

We advise a range of asset managers and asset owners on their ESG requirements and data strategies. If you would like to know more, please contact us using the form below.

Experts James Tasker (left) and Dan Sharp (right)

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About the author

James Tasker

Senior consultant

My key area of focus has been helping clients navigate ESG challenges and developing thought leadership in this space