The search for outcome-oriented ESG data

The search for outcome-oriented ESG data

Anne Matusewicz and Jérémy Rasori of Reporting 21, recently sat down with Private Equity International to discuss changes to the ESG landscape for private markets investors in recent years, particularly when compared to the public markets.

Jérémy Rasori
Senior Sustainability Consultant

Anne Matusewicz, CAIA
Co-Head of ESG & Impact Strategy

Interview Summary

There has been a significant increase in attention given to ESG in the last five years, with more dedicated hires at senior levels, as well as through investment and the attention paid to ESG data and value creation strategies. The attention increase is due in part to the Sustainable Finance Disclosure Regulation (SFDR), which has changed the course of ESG in Europe and forced a lot of players to start formalizing policies and collecting extra-financial data.

In the US, the lack of regulatory requirements means that it is 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.

Further, LPs are asking more questions about ESG strategy, what teams look like and how governance structures work, and they are demanding more data. Even smaller firms are starting to bake ESG into their mission.

Read the full interview to understand:

    • How has ESG evolved for private markets investors in recent years, particularly when compared to the public markets?
    • How have the attitudes of large private markets investors towards ESG changed compared to five years ago, and how do approaches vary between the US and Europe?
    • Are portfolio companies open to responding to ESG surveys? What is the feedback from them on the issues that arise?
    • Is there a difference in the level of engagement between GPs and LPs?
    • Where are LPs still looking for guidance when it comes to tracking ESG across their private markets portfolios?
    • Where do you expect to see PE firms focusing their ESG efforts in 2023 and beyond?

Read the full interview.

Top 5 PE ESG Priorities for 2023

Top 5 PE ESG Priorities in 2023

On January 10, 2023, Private Equity Wire hosted a webinar, Top 5 PE ESG Priorities in 2023: How should GPs define, recalibrate and improve ESG policies over the next 12 months, with the following panelists:

Here are the five key takeaways from the discussion.

1. Regulation is the bare minimum

Regional regulations are incredibly important – but they aren’t what’s driving the surge in ESG data collection. The Securities and Exchange Commission (SEC) is expected to publish new ESG rules in March 2023, but, according to the panelists, private markets investors need to think about ESG reporting whether or not there is government regulation.

Sanaz Raczynski

“We don’t [measure ESG] just because regulation is asking for it, it’s also the supply chain partners of our portfolio companies – we’re mid-market. A lot of these larger corporations have requirements of their own. We’re not going to change our process just because a regulation is not going to go a certain way or if the SEC proposal changes significantly in March when it’s finalized. Our process and data collection is going to stay because it’s future proofing the business and we’ve started reporting on this data to the supply chain and the customers.”

2. Decision usefulness

Not so long ago, there was virtually no universal way to track ESG key performance indicators with individual companies scrambling to understand materiality and data collection. Now, the infrastructure is there, but firms struggle to decide what data to collect with different stakeholders requiring different metrics.

Anne Matusewicz, CAIA

“Only collect “decision useful” information. We work with clients and they want to ask a ton of questions to their portfolio companies. Step back – what is most relevant? Think about materiality, but also understand, how are you going to use this data? How are you making sure it’s consistent?

And when we think about linking up questions that are already asked eight different ways, how can we make that consistent, both for how the portfolio companies are responding and how all the GPs are analyzing that data?”

“Reporting is not the purpose, it is the output of your strategy. “

Heidi DuBois

3. From ESG to impact

What is ESG? ESG data collection is a start. What you do with the data is what’s important and this is where LP requirements are headed. Having an ESG policy at your firm is tablestakes.

Heidi DuBois

“You can capture the ‘what’ today – Yes, I have a policy. Yes, it has these components to it. Often in meetings about ESG you’ll hear questions about ‘how.’ What are you doing on the ground to implement this? … You can sign up to an initiative but being actively engaged is the proof in the pudding.”

4. Standardizing the standards for portfolio companies

Sometimes companies have poor ESG practices, which then involves education and developing a plan for improvement. If ESG risk mitigation is not possible, investors are not afraid to walk away.

Sanaz Raczynski

“Our goal is to ensure “non-financial” factors are included in the valuation process and they’re not overlooked. If we’re looking at company that is scoring poorly on ESG, that’s okay, we’ll make the acquisition and I have a plan to improve ESG performance and the cost of what it takes to make that improvement should be accounted for (in valuation). And there are places where I’ll say it’s production is something we can’t mitigate so we walk away from [the acquisition].

5. Translating ESG into value

Adoption of ESG best practices is a combination of education, governance, and value creation. Start with low-hanging fruit – for example, can a company save money on energy costs and improve ESG metrics at the same time? At the end of the day, private markets investors want to create value and see their investments flourish so it’s about proving the value of ESG rather than an exercise in checking-the-box.

Heidi DuBois

“It goes back to governance – like most things do. Portfolio companies, in my view, should be going to their boards with their plan at the beginning of the year. Mid-year, how it’s going, what the unexpected roadblocks are, where they’re making inroads. And then an end of the year assessment. That is a function of the boards paying attention and having that expectation from management.” 

What's next for ESG in private markets?

“From a thematic perspective, climate is going to continue to drive the agenda as well as representation in the workforce.”

Sanaz Raczynski

Heidi DuBois

“There are a lot of bad things happening in the world, but there are a lot of good things happening, too. I think it’s an amazing time to be alive and be in business. If you step way, way back, we’ve had an industrial revolution, a digital revolution that’s continuing, maybe we’re having some sort of low carbon revolution. If that trajectory continues, whole new businesses will be created.”

Mike Bridge

“For those waiting for a convergence of frameworks and clear standards, you can’t wait. You just need to get started.”

“We’ll see an understanding of where you stack up as GP, where do your portfolio companies stack up? An increase in understanding of benchmarking and what is a relevant comparison.”

Anne Matusewicz, CAIA

Watch the full discussion