A lack of standardized ESG reporting requirements or questionnaires and the subjectivity of the field of ESG data continues to challenge both sponsors and investors.
But technology is helping GPs and LPs get the ESG data they need in order to measure the effectiveness of their own programs and evaluate how certain investments can impact their portfolios, says Paymun Saket, managing director – LP products at Allvue Systems.
ESG due diligence in the private markets has traditionally been more of a manual process since the data isn’t publicly available.
“PE sponsors have to request the ESG data they need from their portfolio companies, and the LPs have to request the data from the managers,” Saket explained. “It’s very time consuming. All of that information is received in different formats and is difficult to analyze. But if you have a flexible technology solution, then you can automate that data capture and centralize the information. You then have more time to review the information, analyze it and validate it.”
Saket said technology can be used to grab ESG data from portfolio companies, compile it in a useful way and then share it with LPs. And, because investors are asking more pointed ESG questions and are looking to see how firms mitigate various risks within their underlying portfolio companies, GPs can respond to due diligence questions much more quickly when the data is centralized and easy to access.
The data can also be updated much more easily and shared with investors for ongoing due diligence, Saket notes.
Furthermore, technology needs to be flexible as investors’ needs change and new regulations are implemented. “Your technology should be flexible so that it can evolve along with ESG requirements and areas of focus,” Saket explains. “Right now, there is a lot of ambiguity around what to ask about PE firms’ ESG programs or those of an underlying portfolio company. There are different questions based on different industries and geographies, and there’s a lot of variability across the board, across asset classes. So, you need a technology solution that can be flexible with the data collected and how it’s disseminated.”
Currently, there are no standardized ESG reporting requirements, so investors and firms can only rely on industry guidelines to determine what information to collect and analyze. The Institutional Limited Partners Association has its Portfolio Company Metrics Template, which includes a voluntary ESG reporting section, and has a list of recommended due diligence questions.
Saket adds that regulatory requirements also add to the heterogeneity of disclosure requirements and data availability. ESG regulations in Europe are much more developed and specific than in the US. However, the US is trying to catch up, with the SEC last month proposing a rule requiring public companies to disclose information about its climate-related risks that are “reasonably likely to have a material impact on” their businesses.
“I think private equity GPs and LPs need to ask more of their technology, to expect that it will evolve with the firm, with the ESG landscape and with the new regulations coming down,” Saket advises. “There’s a lot to consider with ESG due diligence, there are a lot of variables and I don’t think that will change. There will always be a lot of variability. So, I think private equity firms can really make this whole process easier and less time consuming with the right technology.”