Private equity ESG reporting. Don't just report: Communicate.

The private equity sector has historically focussed on environmental, social and governance (ESG) compliance, but there is a growing consensus in the industry that there is a strong business case for managing ESG more actively to deliver strategic value. 

In addition, investors are increasingly asking for more information about non-financial performance of investments and there is concern that these information requests are proliferating.

Developing effective external ESG reporting provides a good opportunity to not only answer investor questions on non-financial performance, but create a compelling narrative as to how an asset manager is adding value through active ESG management.

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 ESG reporting for Private Equity: Improve reporting quality and effectiveness


Demonstrating value to investors

The private equity sector has historically focussed on environmental, social and governance (ESG) compliance, but there is a growing consensus in the industry that there is a strong business case for managing ESG more actively to deliver strategic value.

There are four key levers for more active ESG management:

  • Enhanced risk identification and management
  • Realising additional value creation opportunities
  • Demonstrating integrity, and
  • Achieving potential enhanced exit premiums

In addition, investors are increasingly asking for more information about non-financial performance of investments and there is concern that these information requests are proliferating.

Developing effective external ESG reporting provides a good opportunity to not only answer investor questions on non-financial performance, but create a compelling narrative as to how an asset manager is adding value through active ESG management.

What does a good ESG report look like?

It is important to focus on communicating effectively with stakeholders, not just providing them with information. To do so you must determine what the key messages and metrics are for the fund and investee companies, who the intended audience is for your report, and how best to demonstrate that you are not only complying with ESG requirements, but are adding value.

There are three important aspects to a good ESG report:

  • Explain your approach to ESG management at the portfolio level, and describe how it adds value,
  • Determine and report on the material ESG for investee companies, key operational risks and opportunities for value creation,
  • Understand what the key issues are for investors and stakeholders, and determine how best to provide this information.

A good report will place the ESG issues in the context of the business and integrate financial and non-financial reporting.

Metrics should be determined by what is material to the strategic success of the business, not just what data is easily available. They should take into account investor interest and what the key ESG issues are at the fund and investee company level.

Qualitative reporting also plays an important role, demonstrating through case studies and examples how you have been able to put your ESG strategy into practice.

Guidance

Examples of good practice ESG reporting:

 

KKR

KKR have a well developed ESG and citizenship programme with materiality based impact reporting and active engagement on ESG issues with portfolio companies and a wide range of stakeholders.

Actis

Actis is one of the leading Private Equity firms on ESG issues with a full time ESG team and a progressive and innovative approach to measuring non-financial value (see the Actis Impact Model).

Doughty Hanson

Doughty Hanson has a mature ESG policy that has been well implemented. They have worked with WWF to develop a good sustainability report and are actively involved in social investment with Bridges Ventures and EVPA.

Permira

Permira has excellent ESG reporting at both the fund and investee company level. The detailed investee company reports are good examples of clear and effective reporting, using quantitative and qualitative data effectively.

Interview with Mark Nicholls

Brite Green managing partner Darren Chadwick speaks with Mark Nicholls about effective ESG reporting. Mark is an experienced environmental journalist, having reported on environmental markets, responsible investment and ESG disclosure for over 15 years. Mark is the founding editor of Environmental Finance and a Director at MRG comms ltd.

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