Standardized reporting is a perennial issue in private equity. Over the years, industry groups have issued various reporting templates and worked towards ‘convergence’ of international accounting standards.
It’s not just discrepancies between GP’s different valuation methods or capital call forms that can be problematic for LPs – how different fund managers measure and manage their environmental, social and governance (ESG) practices has also become a big talking point, according to panellists at PEI’s Responsible Investment Forum in London this week.
Marta Jankovic, senior sustainability and governance specialist at APG Asset Management, and Edward Norton, senior ESG adviser at TPG Capital, noted that more discussion between stakeholders was needed to decide on the appropriate scope and purpose of a common ESG reporting template.
“The question needs a lot more interaction and dialogue between LPs, asset managers and GPs. We need a clear understanding of why we’re doing it, what we report on, who will do it, and how it will be used,” said Norton.
The reason we’re pursuing ESG is to be able to make better investments, find opportunities, assess risks, hire better people… We never did this because we needed to report to LPs
StandardiZed reporting would make this dialogue more practical, suggested Lorenzo Saà, head of reporting and assessment at the UN’s Principles for Responsible Investment. “It provides LPs and GPs with a management tool, and sets a common understanding of the area that should be overseen. It allows both parties to make sure they speak a common language.”
He noted the PRI was seeking to answer these issues; in March it released an ESG disclosure framework, which followed on from reporting framework released last year.
Norton cautioned that the technicalities of reporting shouldn’t make GPs and LPs lose track of why they were monitoring or improving their ESG framework in the first place. “The reason we’re pursuing ESG is to be able to make better investments, find opportunities, assess risks, hire better people. We do what we do because we want to be on the right side of history. We never did this because we needed to report to LPs,” he said.
He argued that reporting on ESG, rather, should be a natural component of the long-term relationship between LPs and GPs. As such, he thought disclosure shouldn’t be limited to what aspects of ESG prove financially material to a particular investment, but should seek to provide an honest picture of portfolio companies to LPs.
Jankovic noted LPs increasingly wanted to spend time looking at GP’s investments through an ESG prism and see how monitoring works on the ground. And that they weren’t simply interested in this information on a one-off basis. “Reporting is something to consider throughout the life of an investment. It allows us to see if this investment is a healthy one.”
She added, however, that LPs’ understanding and demands in terms of ESG reporting varied significantly between geographies – and GPs can help raise their awareness. “There will always be LPs who don’t care about ESG. But there are some who will embrace it with time – just at a different stage,” she said. “GPs who are communicating about ESG, in some ways, are also educating their LPs who would otherwise not think to ask about this type of information.”