October 5, 2021 - by Tess Virmani. The lack of standardization of ESG reporting – as well as the lack of availability – is the great bugaboo of financial market participants (and regulators) when it comes to ESG.  While public markets currently await upcoming SEC rulemakings on ESG, the private markets are moving forward. Last week, a group of LPs and GPs representing more than $4 trillion in AUM unveiled a partnership around the collecting and reporting of certain ESG data called the ESG Data Convergence Project. CalPERS and Carlyle led this collaboration but they are joined by a number of other LPs (AlpInvest Partners, APG, CPP Investments, Employees’ Retirement System of Rhode Island, PGGM, PSP Investments, The Pictet Group, Wellcome Trust) and GPs (Blackstone, Bridgepoint Group Plc, Carlyle, CVC, EQT AB, Permira, and TowerBrook Capital L.P.) The founding group is set to grow, however, as all GP and LP firms that support the Project are able to join. This project represents the first large-scale collaboration on ESG data in the private markets and is greatly welcomed by many market participants.

The goal of the project is to create a critical mass of material, performance-based, comparable ESG data from portfolio companies. Per the press release, the collection of this data “will allow GPs and portfolio companies to benchmark their current position and accelerate progress toward ESG improvements, which the group believes drives better financial outcomes. This will also enable greater transparency and provide more comparable portfolio information for LPs.” GPs will track and report six initial metrics from their portfolio companies – Scopes 1 and 2 greenhouse gas emissions, renewable energy, board diversity, work-related injuries, net new hires, and employee engagement. This set of metrics is likely to grow in the future, however, with Bloomberg reporting that CalPERS’s CEO shared that she would like to see C-suite diversity and employee satisfaction be included in the future. The reporting cycle will begin with calendar year 2021 and the data will be shared directly with invested LPs by GPs and aggregated into an anonymized benchmark by Boston Consulting Group (BCG) for this first cycle. The group also intend to meet annually to assess the prior year’s data, and to refine and build on these initial metrics, prioritizing materiality.

This Project is direct recognition of two important principles: 1) ESG information is critical to understanding financial performance and 2) market driven solutions require collaboration. These principles apply equally in the leveraged loan market where managers are grappling with a multitude of ESG data requests from their investors in the absence of available, reliable ESG data. But, the problem is not without solutions. One concrete step that market participants can take is to use the LSTA’s ESG Due Diligence Questionnaire (ESG DDQ). The ESG DDQ solicits a baseline of ESG information on the borrower at a single point in time, typically at the syndication stage of a primary market transaction. Best practice calls for the completed ESG DDQ to be posted to the data site (public side, if one exists) for the relevant transaction for the benefit of lenders / prospective lenders. Similarly, the DDQ should be shared on the data site administered by the Agent for the benefit of prospective loan buyers. Establishing a standard reporting process in this way will improve efficiency in the market and attract new investors but it takes collaboration by market participants.

For more information, please contact Tess Virmani.