How do you expect the industry’s take-up of ESG-related tech and data tools to develop?
Ellen de Kreij: The pace of the adaptation of data solutions is rapidly accelerating. Any firm that is not moving away from Microsoft Excel sheets today will find it very hard to catch up in future years. It is imperative that companies held in private market portfolios adopt a similar approach to ESG data gathering through technology solutions as public market companies. In the public markets you can already see the full integration of financial and non-financial data in reporting. It enables better decision-making and informs stakeholders about areas of ESG materiality and its effect on value.
Caroline Löfgren: There will be a shift towards streamlining and standardizing ESG standards, and platforms will support this. There will be continued focus on tools to measure Scope 3 emissions especially. Equally, carbon emissions reporting will shift to real time as tools connect into enterprise resource planning systems. We will also see non-ESG-focused software systems looking to provide ESG-related services, such as HR systems offering gender pay gap reporting. This is a positive change as it helps embed sustainability into business as usual, rather than a siloed process.
Carmela Mondino: There will hopefully be greater take-up of ESG-related tech and data tools, as these are important for the collection of robust and meaningful data. From my side, I hope there is also some consolidation among different providers. I receive at least two service provider requests a week to discuss their offering in the space and it is difficult to manage. I see the opportunity, but I hope one or two winners emerge to make the landscape simpler.
Elizabeth Seeger: We believe that the demand and need for ESG reporting will only continue to grow as disclosure requirements and regulations evolve, and investors continue to push for even more transparency around ESG risks and opportunities. There is no way to achieve this without solutions that enable scale and consistency, so technology will play a critical role in the collection and analysis of this data and we expect to see an increased uptake of new tools in coming years.
How has the private equity industry’s approach to ESG data, as well as the tools to manage and make use of that data, evolved over the course of your career?
EdK: The industry has come a long way in how it approaches ESG data. For many years, the industry largely relied on Excel spreadsheets to gather and report on ESG KPIs. This system was clunky and often led to duplicated efforts, and with limited ability to share and analyze data effectively.
However, over the years there has been a shift towards more sophisticated systems – in the case of Apax, [we adopted] a data lake system to better capture data beyond financial metrics.
For us, the drive to implement a more comprehensive data platform has mainly come from the desire to future-proof portfolio companies by helping them use tech to better capture key metrics for value creation, including ESG data. Once the portfolio companies have systems in place that allow for the effective collection of ESG KPIs, we can better extract the data we need and the data our LPs and regulators ask for.
CL: I’ve seen a vast increase in ESG reporting platforms on the market, in response to an increasing level of commitments to ESG targets set by businesses and regulators. There is also significant demand for consultants, especially in the carbon accounting space, to the point where experts are inundated and cannot support every business. As a result, businesses need reliable tools to help assess their progress. There have been accelerated efforts in the past year to standardize ESG data and this is a very positive change that will help everybody.
CM: We have gone from ESG data being nice to have to a regulatory requirement that informs an investor’s manager selection, just as with financial data. In that context, the tools used, the robustness of data collection processes, and the assurance provided now need to meet new quality standards, and companies won’t be ready for a while. At Partners Group, we are working with our portfolio companies to get them ready ahead of time, but it is a long, intense process.
ES: We’ve seen a proliferation in ESG data and reporting platforms over the past decade. For example, 10 years ago, a company that wanted to understand its diversity profile would rely on a handful of basic and manually sourced metrics around workforce composition. Today, that same company would likely have access to tools that allow for deeper analysis of many more data points, including attrition and promotion rates, as well as employee survey feedback by demographic.
The number of ESG-focused consultancies and data solutions providers has also increased, and many of those companies are evolving their offerings to cover a broader range of ESG data needs. For example, one of our portfolio companies, ERM, recently launched an AI-enabled ESG rating platform designed to be used as an early-stage diligence tool for private credit investors.