Businesses across all sectors are facing increasing pressure to operate in a sustainable and socially responsible manner, as the world grapples with challenges related to climate change and other social and environmental issues. This responsibility applies to all types of companies, not just those in the private equity industry. However, companies, regardless of their size or sector, have a unique obligation to ensure that they operate sustainably and with social responsibility.
ESG (Environmental, Social, and Governance) reporting is an essential tool for all companies to demonstrate their commitment to sustainability and social responsibility. ESG reporting involves disclosing information on a company's environmental, social, and governance performance, and it helps stakeholders assess the company's impact on the environment and society.
The Value of ESG Reporting for Private Equity
ESG reporting can provide private equity firms with valuable insights into their portfolio companies' environmental and social impact and governance practices. According to a report by PwC, 72% of Private equity firms always screen target companies for ESG risks and opportunities at the pre-acquisition stage. Additionally, companies with strong ESG performance are more likely to attract and retain investors, reduce their cost of capital, and improve their long-term financial performance.
Several private equity firms have successfully integrated ESG considerations into their investment strategies. For example, TPG's Rise Fund has invested in companies that are addressing ESG issues such as access to healthcare, education, and clean energy. As of 2023, the Rise Fund has invested in 55+ innovative companies which create impact around the world. Find out more
Another example is KKR's Green Solutions Platform, which invests in companies that provide solutions to environmental challenges such as climate change, resource scarcity, and pollution. As of 2021, the Green Solutions Platform has invested in over 20 companies and generated a net IRR of 35%. Find out more
How to get started?
I want to start working on ESG. What should I do?
Understand Regulatory Landscape: Private equity firms must first understand the regulatory landscape related to ESG in the regions and industries they invest in. This includes identifying any ESG reporting requirements or guidelines that apply to their investments. Adhering to relevant regulations will help mitigate legal and reputational risks while demonstrating a commitment to responsible investment practices.
Identify Key Stakeholders: Determine the key stakeholders involved in your private equity investments, such as limited partners, portfolio companies, regulators, and NGOs. Understanding their ESG expectations and preferences is essential in tailoring the ESG integration approach.
Review ESG Frameworks: Explore and evaluate ESG frameworks specifically designed for private equity investments. Consider factors like the frameworks' depth, coverage of material ESG issues, and integration feasibility within your investment process.
Assess Portfolio Companies' ESG Risks and Opportunities: Conduct a comprehensive ESG assessment of your portfolio companies to identify material ESG risks and opportunities. Prioritise areas with significant environmental, social, or governance impacts to focus on the most relevant ESG issues.
Define Relevant ESG Metrics: Determine the ESG metrics that align with your portfolio companies' operations, industries, and stakeholder expectations. Common ESG metrics for private equity investments may include carbon footprint, employee satisfaction, supplier diversity, and governance structure.
Set ESG Targets and Goals: Work with portfolio companies to set measurable ESG targets that align with their long-term strategies and values. Encourage companies to adopt best practices, enhance their ESG performance, and drive positive impacts.
Develop an ESG Integration Strategy: Create an ESG integration roadmap that outlines the steps and timelines for integrating ESG considerations into your investment decision-making process. Assign responsibilities to team members and identify any additional resources required.
Engage with Industry Experts: Engage with ESG experts, industry peers, and ESG-focused organisations to gain insights into successful ESG integration strategies. Learning from others' experiences can provide valuable guidance for your private equity firm's ESG journey.
By following these steps, private equity firms can effectively integrate ESG considerations into their investment processes, aligning their strategies with stakeholder expectations and sustainability goals. This approach fosters responsible investment practices while generating positive social and environmental impacts within the private equity portfolio.
There are several existing ESG reporting frameworks and guidelines that firms can use to report on their ESG performance.
Here are some of the most widely used frameworks and guidelines:
Global Reporting Initiative (GRI) - GRI is a widely used framework for sustainability reporting, which provides guidelines for organisations to report on their economic, environmental, social, and governance performance. Private equity firms can use the GRI framework to report on the ESG performance of their portfolio companies. Used in over 100 countries, with a significant presence in Europe, Asia-Pacific, and North America. According to The KPMG Survey of Sustainability Reporting (2022) which examined the disclosure practices of the world’s biggest 250 companies by revenue (the G250), as well as a larger pool of the top 100 businesses in each of 58 countries, 78% of the G250 now adopt the GRI Standards for reporting (up from 73% in 2020);
Sustainability Accounting Standards Board (SASB) - SASB is a nonprofit organisation that provides industry-specific ESG reporting standards for publicly traded companies in the United States. Private equity firms can use the SASB standards to report on the ESG performance of their portfolio companies, particularly those that are publicly traded. Mainly used in the US, with some adoption in Europe and Asia-Pacific. According to SASB, over 2664 companies globally use its standards for reporting since 2020.
Task Force on Climate-related Financial Disclosures (TCFD) - TCFD provides guidelines for companies to disclose climate-related financial risks and opportunities in their financial filings. Private equity firms can use the TCFD guidelines to report on the climate-related risks and opportunities of their portfolio companies. Widely adopted globally, with a strong presence in Europe and North America. According to the TCFD, over 1,000 organisations globally have expressed support for its recommendations.
Carbon Disclosure Project (CDP) - CDP is a global disclosure system that enables companies, cities, states, and regions to report on their environmental impact and climate change-related risks. Private equity firms can encourage their portfolio companies to participate in the CDP and use the information provided by the CDP to report on the ESG performance of their portfolio companies. Used in over 90 countries, with a strong presence in Europe, North America, and Asia-Pacific. According to CDP, over 9,600 companies disclosed environmental data through its platform in 2020, representing a 14% increase from 2019.
International Integrated Reporting Council (IIRC) - IIRC provides a framework for companies to report on their performance across six capital categories: financial, manufactured, intellectual, human, social and relationship, and natural. Countries where commonly used: Widely used in Europe and Asia-Pacific, with some adoption in North America. According to the IIRC, over 2,500 companies in more than 70 countries use its integrated reporting framework, and integrated reporting is increasingly becoming a mainstream practice globally.
Sustainable Finance Disclosure Regulation (SFDR) is a European regulation that aims to increase transparency on the sustainability characteristics of financial products and services. It sets out requirements for financial market participants to disclose information on how they integrate sustainability risks and factors into their investment decisions, as well as how they consider the impact of their investments on sustainability. The Sustainable Finance Disclosure Regulation (SFDR) is an EU regulation, therefore, mainly used in the European Union.
Corporate Sustainability Reporting Directive (CSRD): The CSRD is a proposed update to the European Union's current Non-Financial Reporting Directive (NFRD) and is expected to come into force in 2023. The CSRD will require companies to disclose sustainability information that is relevant, comparable, and reliable, in order to help investors and other stakeholders make informed decisions. The CSRD will also extend reporting requirements to more companies, including small and medium-sized enterprises (SMEs). It will apply to companies operating in the European Union (EU).
Science-Based Targets Initiative (SBTI): The SBTI is a collaboration between CDP, the United Nations Global Compact (UNGC), the World Resources Institute (WRI), and the World Wide Fund for Nature (WWF). The SBTI provides a framework for companies to set targets that are aligned with the Paris Agreement's goal of limiting global warming to well below 2°C above pre-industrial levels. The SBTI assesses the feasibility and adequacy of companies' emissions reduction targets, and provides guidance on how to set targets that are based on the latest climate science. Companies that set science-based targets are recognised as leaders in corporate climate action. Countries where commonly used: The SBTI is a global framework that is used by companies from a wide range of industries and countries. The largest number of companies setting science-based targets come from Europe, followed by North America and Asia. ****Over 1,000 companies have committed to set science-based targets, representing a combined market capitalization of over $23 trillion. The largest number of companies setting science-based targets come from Europe, followed by North America and Asia. The use of science-based targets is becoming increasingly popular as a way for companies to demonstrate their commitment to tackling climate change and meet the expectations of investors, customers, and other stakeholders.
United Nations Global Compact (UNGC) - UNGC is a framework that provides guidelines for companies to report on their sustainability performance. It is used by companies to align their strategies and operations with ten principles in the areas of human rights, labor, environment, and anti-corruption. Used in over 160 countries, with a strong presence in Europe, North America, and Asia-Pacific. According to the UNGC, over 12,000+ signatories across 160 countries have committed to its ten principles on human rights, labor, environment, and anti-corruption, making it the world's largest corporate sustainability initiative.
Metrics for ESG Reporting in Private Equity
There are several metrics that private equity firms can use to report on their ESG performance, including:
Carbon footprint: Measuring a company's greenhouse gas emissions is a common way to assess its environmental impact. Private equity firms can report on the carbon footprint of their portfolio companies by collecting data on their energy consumption, transportation, and waste management.
Diversity and inclusion: Private equity firms can report on the diversity of their portfolio companies by collecting data on the gender, race, and ethnicity of their employees and board members. They can also report on efforts to promote diversity and inclusion, such as training programs and hiring initiatives.
Health and safety: Private equity firms can report on the health and safety practices of their portfolio companies, including the number of workplace accidents and injuries, safety training programs, and employee health initiatives.
Corporate governance: Private equity firms can report on the governance practices of their portfolio companies, including board composition, executive compensation, and policies related to ethics and compliance.
Social impact: Private equity firms can report on the social impact of their portfolio companies by collecting data on their contributions to local communities, charitable giving, and efforts to promote social responsibility.
By tracking these metrics, private equity firms can identify areas for improvement and set targets to achieve ESG goals.
Got started. What’s next?
Once an ESG (Environmental, Social, and Governance) reporting framework has been established, the next steps typically involve implementing the framework, monitoring performance, and refining the reporting process.
Implement the Framework: Implementing the ESG reporting framework involves putting in place the necessary systems, processes, and controls to gather and report on the relevant ESG data. This may involve gathering data from various internal departments, conducting audits, and engaging with external stakeholders.
Monitor Performance: Once the framework is implemented, it's important to monitor and track performance against the identified ESG goals and targets. This will involve establishing regular reporting cycles and reviewing the data to identify trends, areas for improvement, and potential risks.
Refine the Reporting Process: As the ESG reporting process matures, it's important to continuously refine and improve the reporting process to ensure that it remains relevant, accurate, and aligned with the organisation's goals and objectives. This may involve revising reporting criteria, expanding the scope of reporting, or introducing new reporting metrics.
Communicate Results: Finally, organisations must communicate their ESG performance to internal and external stakeholders. This may involve publishing regular ESG reports, hosting stakeholder engagements, and responding to stakeholder inquiries. Some companies may conduct annual or biannual ESG reporting and review, while others may opt for more frequent or less frequent assessments depending on their circumstances.
Overall, establishing an ESG reporting framework is just the first step towards embedding ESG considerations into an organisation's operations. Ongoing monitoring, refinement, and communication are crucial to ensure that the organisation remains accountable and transparent in its ESG performance.
ESG reporting is becoming more and more critical for all types of companies. By utilising established frameworks and following best practices, companies can showcase their dedication to sustainability and social responsibility. This helps to ensure that their operations align with sustainable and socially responsible practices. ESG reporting not only benefits the environment and society but also promotes the long-term success and resilience of the business.
