We’ve written before about how private markets are gearing up to integrate ESG into their business practices and investment strategies. Earlier this month, Private Equity International (PEI) published a piece on this trend and laying out key drivers and challenges faced by General Partners (GPs) looking to bolster their ESG data management and disclosures.
Where are Data Demands Coming From?
Demands for ESG data are coming from Limited Partners (LPs), regulators, and industry partners. Each of these groups are looking for ESG data for different reasons and the data they want varies depending on their needs. GPs are overwhelmed by demands for ESG data and face challenges meeting stakeholder needs. PEI states:
“With more data available, and more requests for information coming from regulators and investors, one of the issues facing GPs is how best to collect and manage that data. Indeed in a 2022 survey of more than 150 private capital firms by Intertrust and Eververst Group, more than half of respondents cited data management issues as one of their top three technology-related challenges”
LPs look for competitive advantage in their investments and it appears that many see an advantage in ESG investing. 27% of LP respondents indicated that they will be increasing future allocations in “impact/sustainability” investments according to survey data reported by PEI. In order to make informed decisions on which funds are aligned with their ESG investment needs, LPs need data from GPs on their portfolio’s ESG performance.
LPs hungry for more ESG data are responsible for much of the recent ESG push in private markets. As ESG becomes more important to investor relations, GPs are recognizing the value of marketing their sustainable investment products. To properly market their investments, certain regulatory conditions must be met and claims about a GPs ESG products must be backed up with data.
Regulators are beginning to ask for more transparency in private markets. In the US, the SEC has adopted new rules regarding systemic risk disclosures that could have ESG implications. Additionally, laws like the EU’s SFDR require GPs that have sustainable investment strategies to gather and disclose more data in order to qualify for certain ESG fund categorizations. Regulations are also in a state of constant flux, especially in the EU. As jurisdictions collectively figure out what works and what doesn’t regarding sustainable finance regulation, laws change to reflect emerging needs. This leaves GP compliance teams in a tricky position of having to stay on top of the shifting regulatory landscape. PEI reports that:
“This drive among private equity firms to keep abreast of incoming rules has resulted in an ever-increasing amount of data to evaluate. As firms grapple with these new streams of information from their portfolio companies, many are reassessing the need to employ more staff to support data collection and analysis activities”
Private companies are generally excluded from reporting requirements under the larger ESG focused regulatory frameworks like the EU’s CSRD or the SEC’s Climate-Related Disclosures Proposal. However, reporting obligations imposed on public companies will inevitably trickle down – at a minimum because of supply chain reporting/data requirements. Scope 3 emissions reporting and supply chain due diligence laws have major implications for private companies who may be required to gather and share this data with their business partners.
Public companies that are responsible for supply chain wide ESG reporting will need data from their suppliers. Private companies located upstream in a public company’s supply chain should expect requests for ESG data. These requests are likely to be backed by contractual provisions that require this data to be shared. This presents a challenge for GPs and management teams looking to support their portfolio companies in establishing processes and personnel to collect this data.
What this Means
Whether it is LPs, regulators, or industry partners, demand for data is growing substantially in private equity. To meet this demand, GPs need the right personnel with the right expertise. Data collection, management, and disclosure requires personnel and GPs are in fierce competition to find and retain talent. Large and medium sized firms are putting an emphasis on keeping the personnel they have, while small firms are looking for new hires.
Additionally, many firms are choosing to outsource data functions or partner with third-party firms to help gather, analyze, and report, ESG data. With ESG data taking on a larger role in the world of private equity, there is a need among GPs to build internal capacity around data functions.
PracticalESG.com offers a variety of resources aimed at helping companies figure out how to gather and report ESG information. For those looking for resources on this subject, I recommend checking out our E&S Data Validation Guidebook as well as our Subject Area: Disclosure Controls / Data Validation / Assurance.
