Creating consistency

This harmonization includes the use of standardized reporting standards “ESRS” (European Sustainability Reporting Standards). The first set of these ESRS standards has been proposed by EFRAG to the European Commission in November 2022.

These reporting standards include KPIs from recognized standards such as the he ESRS also list  the PAI (Principal Adverse Impact) indicators required by SFDR, justifying the desire to harmonize reporting standards between financial and corporate players on a European scale.

Governance and oversight

Beyond listing quantitative and qualitative information, companies will also have to describe the sustainability issues governance, review their materiality matrix as well as present their business model and associated risks. The latter will have to integrate the principle of double materiality, a concept aimed at jointly studying the impact of the sustainability factors (environmental, social, human rights…) on companies (i.e.: sustainability risks) and the impact of the company on these factors (i.e.: principal adverse impacts).

Here’s an example:

• Imagine a shoe company starts using a new type of plastic in their sneakers. There is one type of materiality that looks at the impact of the new plastic on the company itself – can they afford to use this plastic in the long term? What is the financial impact to the stock value?
• Double materiality looks at the impact on elements outside of the company. Does the manufacturing of the plastic harm the workers producing it? Does this plastic biodegrade? What is the company’s plan for waste management? If someone wears the sneakers for 1-2 years, how many sneakers does the company expect to end up in a landfill throughout the lifecycle of the product?

These strategic and sustainability reporting elements will have to be published in a dedicated section of the management report, which companies will have to make public on their website. This will require the inputs from all departments, involving not only the CSR departments, but also the financial, accounting (companies must publish their taxonomy-alignment in their sustainability reporting), purchasing, and human resources departments, to sustainably modify the organization and value creation of companies.

12 draft ESRS requiring companies to identify their sustainability risks, mitigation policies and practices and report data on a list of mandatory KPIs based on the most material sustainability issues for each company. These sector-agnostic standards cover the following topics: climate change, pollution, water and marine resources, biodiversity and ecosystems, resource use and circular economy, own workforce, workers in the value chain, affected communities, consumers and end-users, business conduct (beyond general requirements and disclosures). Sector-specific standards will be added in 2023 and 2024. More information here.

Subsidiaries will be exempt from reporting if they are included in the parent company’s consolidated reporting.

Companies will need to have robust internal reporting processes, as 50% of the published data (both qualitative and quantitative) will be audited.

For companies already subject to the NFRD, the main task will be to integrate the CSRD requirements (in particular, considering the principle of double materiality in their business model, monitoring new indicators etc.). For companies reaching the new CSRD thresholds, the main task will be to set up new processes to identify and mitigate sustainability risks and adverse impacts, formalize policies and initiatives, and monitor and consolidaterequired KPIs.

Reporting 21 can help your organization focus on the essentials. Reporting 21 already assists many corporate clients – from listed large organizations to small companies new to the exercise – with sustainability advisory and reporting software implementation.

Contact us to learn more about our customized support based on the challenges and the level of maturity of your company.

Progressive transition to the reasonable assurance required by the CSRD (50% of audited published) compared to the DPEF in France which required moderate assurance (20% of audited published data). The reliability of the data will be guaranteed by the audit committee in place in the companies (if the governance in place includes such a committee). Shareholders (5%) may request an audit by an accredited ITO. Reflection is underway to also give lawyers the possibility to audit the data.

Earlier this month, we enjoyed a quick trip to New York for the PEI Responsible Investment Forum. It was great to connect with clients and industry leaders in person! We heard from several of our clients and their peers on ESG reporting considerations, portfolio company engagement, deal team collaboration, the regulatory outlook, and societal perceptions of our industry permeating national headlines. It was exciting and inspiring!

Among the observations shared, a few themes stood out to us:

There is no such thing as bad publicity. Garnering media attention and eliciting backlash on the national stage means that our collective awareness is being raised, bringing ESG considerations front and center. The media tend to suggest that critics abound, but for each critic there are myriad proponents. The focus on ESG is being both sharpened and amplified. The value we create is here to stay.

Efforts to standardize reporting for improved efficiency and scaled benefits, including benchmarks, stood at odds with interest in tailored metrics dependent on portfolio company industry or GP or LP priorities. Everyone wants the process to be easier – there are too many surveys and bespoke metrics – but not necessarily at the expense of attaining decision-useful ESG data.

GPs and portfolio companies commented on the breadth and depth of data collection sought. They shed light on the herculean efforts and bandwidth (or lack thereof) required to accurately respond to data requests and effectively address action plans. LP/GP priorities and GP/portfolio company activities of greatest impact are not always aligned.

In certain cases, efforts to improve efficiency in the name of enhanced ESG performance on the part of the portfolio could result in wildly inefficient allocation of resources, not to mention placing an undue burden on a company that would rather direct those resources to more impactful activities core to their business (materiality is in the eye of the beholder).

LP/GP engagement with GPs/portfolio companies is fundamental to elevating ESG efforts that create real value. Connecting the team on the ground with those who consistently have a seat at the table can lead to more successful outcomes.

At Reporting 21, our team is ready to guide you through this tumultuous and exhilarating time for our industry. Our collective wealth of ESG and impact expertise can be deployed to help you tackle these and other challenges across your entire investment lifecycle.

Sustainability has increasingly become a key focus for private equity firms. Having a sustainability strategy in place is not only a compliance requirement, but also a way to stay competitive in the market and attract top talent.

If your firm hasn’t yet taken the plunge into tracking and reporting its ESG data, here are a few simple reasons to get started sooner rather than later.

One of the main reasons for private equity firms to have a sustainability strategy is compliance. With the introduction of European regulations such as the Sustainable Finance Disclosure Regulation (SFDR) and Corporate Sustainability Reporting Directive (CSRD) (applicable to portfolio companies), reporting on Environmental, Social and Governance (ESG) stakes is becoming mandatory. Having a framework in place to address these regulations can ease the task of compliance and ensure that all necessary information is readily available.

In the U.S., the lack of regulatory requirements means that it’s not necessarily mandatory for private markets investors to disclose ESG information. However, many GPs do business in Europe, have European assets in their portfolios, or employ European companies as part of their supply chain.

Another important reason is market evolution. More and more companies are implementing sustainability strategies, making it a standard and criteria for investors. By having a sustainability strategy in place, private equity firms can stay ahead of the competition and attract more investors who are interested in sustainable investments.

By demonstrating to GPs and LPs that the firm takes ESG data into account, private equity firms can answer growing expectations from shareholders who themselves are subject to ESG regulations.

Some investors are not only asking for data but also asking for portfolio company data. Even though they have invested in a fund, they don’t just want consolidated data, they want to get into the granular detail from the bottom up. There is a real hunger for data in the private markets, unlike the public markets where we now arguably have too much data.

Sustainability strategies can also lead to better employee engagement and improve an employer’s brand. By showing employees that the firm prioritizes ESG data, they may feel more committed to the company and more motivated to work towards its goals. Additionally, an improved employer’s brand may attract top talent who are interested in working for a company that cares about sustainability. This is particularly true of younger generations just entering the workforce, 90% of whom are willing to earn less money to do more meaningful work. 

Lastly, by enhancing innovation and anticipating market trends, private equity firms can stay ahead of the competition and be better positioned to capitalize on new opportunities.

Overall, having a sustainability strategy in place is becoming increasingly important for private equity firms, as it helps them to stay compliant, stay competitive, and create value for all stakeholders.