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Initiative Aims to Standardize ESG Reporting for Private Equity Investors

Initiative Aims to Standardize ESG Reporting for Private Equity Investors
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More than 100 private equity investors, managers, and advisers have joined together in efforts to improve environmental, social, and governance (ESG) data collection for private companies. Initially backed by CalPERS, the $500 billion state pension plan, and the Carlyle Group, a publicly traded global private assets investor, the Data Convergence Project asks participants to adhere to a standard set of ESG data points provided for portfolio companies owned by participating private equity managers.

The reported metrics include a breadth of ESG-related topics, ranging from carbon emissions to workforce turnover. The metrics will be anonymized and aggregated by a third-party firm annually, and then released in the form of a benchmark to participating limited partners (LPs) and general partners (GPs).

Background on the Data Convergence Project

Responsible investing encompasses a wide range of topics, and institutional investors often have varying preferences on which areas to focus on. Private equity GPs have found themselves struggling with a large number of customized ESG-related data requests from their LPs, and limited partners have found it difficult to interpret the ESG data provided without a reference point or any means of comparability against industry peers.

To resolve these issues, a cohort of large private equity investors and general partners started a conversation to improve the consistency and usefulness of ESG data collection for private companies. This dialogue led to the formation of the Data Convergence Project, which has 41 LPs and 85 GPs participating today.

For the inaugural reporting cycle, participating general partners will provide portfolio company metrics to their limited partners that fall under six ESG-related categories:

  1. GHG emissions
  2. Renewable energy consumption
  3. Diversity of board members
  4. Work-related injuries
  5. Net new hires
  6. Employee engagement

Bottom Line

While both public and private companies have historically suffered from a lack of consistent ESG reporting and disclosures, the private markets especially have been slow to incorporate ESG reporting as a result of limited regulation, conflicting reporting frameworks, and the inherently “private” nature of private companies. Though still in nascent stages, the Data Convergence Project represents a new and important development for comparing ESG performance in the private equity industry. Limited partners that consider ESG performance when making investment decisions should benefit from better consistency and comparability associated with this initiative.

The success of the project may ultimately depend on the level of adoption from GPs, as participation is voluntary. And any insights gathered about ESG performance would likely be most reflective of larger, better-resourced private equity firms that are well-equipped to implement this level of reporting. But as the project develops, there is potential to expand the number of data points used in the benchmark, and create similar benchmarks for other private asset classes such as real estate.

More information about the Data Convergence Project and how to get involved is available on the Institutional Limited Partners Association’s website.

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