ESG performance measurement in the private equity space is shifting from being a risk mitigation factor to an opportunity for value creation. This shift requires a change in mindset, where ESG assessment isn’t a secondary option but a necessity. Rather than collecting raw data, the focus is moving toward the convergence of metrics — collecting and reporting targeted sustainability data that provides a clearer picture of both a company's ESG maturity and how it is stacking up against its peers.
Still, we are in the early days of assessing ESG performance in a standardized and results-oriented way. Challenges remain and they are more pronounced for some sectors than others. Following the Private Equity Wire and EcoVadis webinar Building ESG Performance with Your Portfolio Companies hosted in July, here we explore challenges facing the private equity industry and seek to answer the question: How can private-equity firms build ESG performance with their portfolio companies?
The Lens of Materiality
To meet the demands and expectations of their limited or general partners, portfolio companies are developing ESG strategies and employing dedicated teams. “Most LP demands haven’t been standardized, and also most GPs still experiment with what they are looking for.” Portfolio companies are asked to deliver on those themes, while at the same time developing overall ESG maturity and capabilities across all ESG factors. “There is clearly a lot of impact on portfolio companies with additional demands and challenges.” They need resources and support in building a framework that lasts, makes sense and can sustain their ESG efforts. The focus should be on creating value and cost benefits for the portfolio companies, as well as avoiding risks. Private-equity companies aren’t likely to integrate ESG into their strategies unless it’s in their long-term interest, which is why so far it’s been largely overlooked. But the mindset is changing; more and more GPs, alongside their LPs, are incentivizing their partners to have ESG KPIs on the pre- and post-acquisition side, introducing stringent management programs to drive and embed sustainability within the organization.
Data Comparability and Benchmarking Against Peers
“Raw data sits in space without the context around it.” Metrics are meaningless unless you benchmark them against the targets and competition. Performance metrics help map the company’s current position on the prioritized ESG themes and KPIs, and pinpoint how well its performing against its peers. With so many different frameworks available, it can be difficult to agree to a data set that is comparable. Another challenge is the scarcity of ESG data available for the private equity sector. Using third-party data, such as the wealth of rated company insights offered by EcoVadis, can provide meaningful insights and benchmarking points. A lot of companies are only just starting their ESG journey, but as long as they agree on a trusted baseline, identify improvement areas and put in place the right tools and action plans to build an effective management system, they’re going in the right direction. The focus should be on “trusting the data and making the data representative, and at the same time, not blaming the companies that are only starting and aren’t well-equipped today, but rather give them preliminary insights, (...) give them tools and resources,” so that they can accelerate their efforts.
Want more insights? We’ve saved the webinar conversation here. Listen to Sophie Bertreau, VP of Sustainable Finance solutions at EcoVadis, Tulsi Byrne, Head of ESG at Francisco Partners, Otto Kern, ESG Officer at PAI Partners, and Deike Diers, Associate Partners at Bain & Company addressing some key-ESG related questions for the private equity space.
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