• Jonathan Coates, Director |
  • Shireen Tyagi, Manager |
2 min read

In the previous blog , we looked at why environmental, social and governance (ESG) issues matter for Private Equity (PE) firms. With their growing importance, they bring new opportunities for value protection and creation. In this blog, we’ll look at how firms can measure the ESG performance of their portfolios.

ESG reporting is like a prospectus for a PE firm. It not only aims to show the value of the portfolio but also how effectively the PE firm manages, monitors and measures the performance of its assets and investments.

There are some critical questions PE firms are asking while considering the ESG performance of their portfolios.

  • How is ESG data collected across each investee company and asset? And how is it integrated to develop a total portfolio view?
  • What does the ESG performance of individual assets and results mean for the overall performance of the portfolio? How does it contribute to the growth and market reputation of the PE firm?

We have seen more and more firms applying for signatory status to frameworks and organisations such as the United Nations PRI and United Nations Global Compact. This is to align their strategy and reporting capability to global standards. However, most firms still approach reporting from a process lens rather than performance. 

What does good look like and how do you identify and align ESG metrics?

  • Data is already an integral part of a private equity firm’s investment process. It drives decision making all the way from deal sourcing to due diligence and reverse due diligence. It is also key to demonstrating how integration of ESG in asset management activities with portfolio companies has created value.
  • ESG key performance indicators (KPIs) and metrics give investors the confidence that there are clear parameters in place to protect the value of their asset. Understanding the most relevant ones is essential to be able to report on performance at the management company (ManCo) level.
  • As firms onboard, engage and conduct asset management/stewardship activities with investee firms, they need to have a clear mandate for investee companies to define what ESG performance looks like and align it with ESG strategy at the ManCo level.
  • Most investee firms would likely be already producing an ESG report, but private equity firms have the influence to prioritise certain indicators and enhance performance in specified fields.

A holistic view of performance can speak to the ESG capability, expertise and intention of a PE firm and promote it to investors, limited partners (LPs) and investee companies to help establish value. ESG reports serve as a catalyst for engagement and collaboration opportunities across all stakeholders in the PE space.

We believe there are three key takeaways to act on and reap the benefits associated with ESG in PE sector. This isn’t just about compliance. This is also an opportunity to drive financial resilience across your portfolio.

  • A clear ESG strategy at house level aligned to the investment strategy
  • Early identification and collection of metrics and data points needed from investee companies
  • Aggregation at portfolio level which tells the story across value protection and value creation

Contact us today to learn how we can work alongside you on your ESG journey.