Who makes the rules for ESG disclosure?

At its simplest, private market participants are trying to figure out only a couple of issues when it comes to ESG reporting: how frequent and to what extent is an appropriate standard of disclosure?

Earlier this year, private equity giant Blackstone launched new quarterly ESG reporting guidelines for its private equity group’s portfolio companies. The requirements are based on what its real estate group has required since 2019; in addition to annual reporting, Blackstone is now calling for regular updates from portfolio companies to help provide “strategic direction and oversight” towards key ESG initiatives set by the firm last year.

“We believe providing transparency for your directors on ESG-related matters is a best practice,” states a Blackstone letter sent to portfolio company chief executives.

“We have an outsized opportunity to positively impact people and communities,” Blackstone spokeswoman Christine Anderson wrote in an email. “We are making progress on emissions reduction and diversity programs while also aligning ourselves with industry standards and best practices. Data transparency is essential to monitoring the success of those programmes and to reporting on ESG more broadly.”

In interviewing 10 asset managers on what disclosure best practices exactly entails, affiliate publication New Private Markets found a range of policies employed by GPs across geographies, size of firms and focus of strategies. From the benchmark transparency, which typically starts by committing to the United Nations’ Principles for Responsible Investment, to proprietary disclosures, investment firms are reaching different conclusions about the value reporting standards provide when it comes to appeasing their investors.

Here’s a sample of how industry players are approaching the situation.

Calling your own shots

The Carlyle Group, another industry-leading US-based asset manager, also has decided to develop in-house ESG reporting methods, though crafted with guidance from frameworks such as Sustainability Accounting Standards Board. Megan Starr, the firm’s global head of impact, says, “the proliferation of frameworks, signatories and organisations has been great for galvanising interest and showing the breadth of interest in the field,” she says. “But at a certain point, it has also led to adverse outcomes.”

Starr explains that, at Carlyle, investors have requested [responses to] more than 60 different ESG-related due diligence questionnaires over the past quarter.

“I think we run the risk of ESG becoming a reporting and compliance function if we continue to be focused on a growing list of disclosures and frameworks, as opposed to what it’s meant to be, which is a rigorous and nuanced report on performance quality,” Starr explains. On the contrary, she says, “the more companies and investment firms using a smaller number of frameworks, the more valuable those get because you get a critical mass of data.”

Rule but not law

Reporting frameworks have helped firms craft their own ESG reporting approaches, without them having strict accountability measures to abide by. One example of a framework that’s treated more as suggestion than rigorous standard is the Task Force on Climate-related Financial Disclosures.

In a recent survey on responsible investment practices in private equity, financial services company PwC found that only 13 percent of respondent firms said they have structured an approach in line with the TCFD framework, though 36 percent said they are considering climate risk during their due diligence stage.

Nuveen, one of the largest global asset managers in private markets, said in an email that the asset manager “has used the framework to expand our understanding” of climate risks within its portfolio. The French firm PAI Partners added that TCFD is “not really a reporting framework” but more of “an essential set of recommendations to help build your climate policy or strategy.”

Bobby Turner, founder of Turner Impact Capital, a GP that exclusively focuses on impact investing, says the creation of standards for reporting by third-party organisations has been a “good start.” However, he adds that many industry frameworks have been created in a “bubble” in attempts to find a “one-size-fits-all solutions.”

“Part of the challenge is that a lot of the architects of these frameworks are academic in nature. They haven’t actually been on the frontline of delivering and implementing social or environmental change,” Turner explains. “They haven’t necessarily done the field work to create flexible and more accurate reporting.”

Turner says he’d like to see some of the industry frameworks consolidate where overlapping reporting requirements run the risk of creating inefficiencies for both investors and GPs.

For many firms, the decision of which reporting framework to follow or align with is situational.

For London-based private equity firm Apis Partners, global frameworks such as the UN’s SDGs are a “key part” of how it measures ESG and investment impact, the firm wrote in a statement. It also is “currently evaluating” the International Finance Corporation’s Principles for Impact Management and may become a full adoptee later this year. For more focused frameworks, such as SASB and TCFD, Apis says it has not yet found significant reasons to prioritize these guidelines.

Cinven, another London-based firm, has taken a similar approach. Along with being a signatory of the UN PRI since 2009, Cinven has committed to various UK and European-focused frameworks and guidelines such as Invest Europe and Initiative Climat International. When it came to SASB, the firm said it felt the framework “wasn’t sufficiently comprehensive for some of the sub-sectors we focus on.”

New York-based Muzinich, which specializes in private lending, has chosen to focus on global initiatives such as the UN SDGs and PRI as well as the TCFD. “We publicly support the TCFD recommendations and aim to produce our own TCFD reporting from 2022,” the firm states. Meanwhile, in its latest sustainability report, Ares Asset Management reported it now “leveraged” frameworks such as SASB, TCFD and the Global Reporting Initiative “to populate a broad universe of ESG issues”.

What the standard-setters say

Jeff Cohen is head of private investment initiatives at San Francisco-based SASB, a non-profit reporting framework that provides disclosure standards that helps investors and managers craft “industry-specific and financially material” due diligence requirements.

“It’s very challenging to have credibility when there’s a lack of transparency,” Cohen tells New Private Markets. “It’s important that limited partners of GPs know that the information they’re receiving is credible and reputable […] that the information they’re receiving is ultimately informed by issues that an independent third party has identified as likely to be relevant.”

Without the use of industry standards, according to Cohen, it’s difficult for LPs to “separate the wheat from the chaff” when it comes to ESG reporting. It becomes too easy for GPs to say, “this is what we think might be the best thing for you to receive,” he explains.

“If an LP receives reporting from dozens of asset managers, all with their own approach, there’s no comparability or consistency,” Cohen explains. “Without incorporating consistent, comparable disclosure, and if a reporting methodology is completely pulled out of thin air, that’s a marker of potential greenwashing.”

John Hodges, a vice-president at the ESG consulting firm Business for Social Responsibility, adds that dubious reporting standards are the most notable red flag for GPs potentially treating higher investing principles more as a public relations exercise than a means for risk mitigation and value creation.

“A big part of being focused, diligent and progressive with ESG is being transparent about it,” Hodges explains, adding that managers must be willing to give stakeholders open access to information that “allows them to make their own assessment.”

“I’d like to see some GPs go even further and say, ‘we require all of our portfolio companies to have their own ESG report which follows an industry standard disclosure benchmark,” Hodges says. “It’s for their own benefit because something’s going to happen one way when they exit the portfolio, and on day one someone’s going to say, ‘where’s your sustainability information?’”

With ESG reporting currently amounting to a patchwork of standards. The next step for the maturation of such frameworks could be a series of consolidation measures to standardize industry standards. For the time being investors have to rely on the judgement of their GPs as to what they deem worthy of reporting.

(Toby Mitchenall contributed reporting to this story)