October 25, 2022 - When the ESG Data Convergence Initiative first launched last fall it represented the first GP-LP collaboration on ESG reporting in private equity. Looking to tackle the dearth of consistent and comparable data on portfolio companies, the EDCI set out to offer standardized ESG reporting and data collection for private equity.  The EDCI recently celebrated its first birthday and the initial takeaways from the inaugural round of reporting have been shared in a report by Boston Consulting Group, a supporting partner of the initiative. The data received comes from 105 GPs covering nearly 2,000 portfolio companies.

What information was being reported?

GPs reported on six categories of metrics: greenhouse gas emissions, renewable energy share, board diversity, work-related injuries, net new hires, and employee engagement. Looking to the next reporting cycle, the number of female C-suite employees will also be included in GP reports.

How does private equity stack up on ESG?

As expected, BCG finds that privately owned companies are behind their publicly owned peers on key climate and diversity metrics. In comparing the reporting results against similar ESG data from companies in the public markets, private companies, on average, are starting from a lower ESG baseline as their ESG focus is newer. Looking at renewable energy usage, the median public company sources 17% of its energy from renewable sources compared to 10% for the median private company. Where 45% of private companies has no women on their boards, that is true for only 12% of public companies. BCG points out, however, that private companies can be expected to make strides on ESG issues finding that “managers can be highly effective at rolling up their sleeves and promoting change”. In addition, BCG observed that “private companies have been highly effective at creating new jobs in recent years” with “higher rates of job creation, net of employee attrition, than their publicly owned peers.”

How can private equity use its investment model to an ESG advantage?

As noted, typical private equity models see firms taking a long-term view on a company’s performance in which they keep ownership and control to achieve performance projections. ESG indicators are highly relevant in such a model and GPs are in the position of driving change. As an example, BCG found that PE funds that have tracked their underlying portfolio companies’ use of renewable energy over time “increased usage by 10% from 2019 to 2020 and by 13% from 2020 to 2021. Similar results on over ESG indicators seem reasonable.

How can EDCI’s work in private equity help credit investors?

Reporting by GPs is made directly to LPs through Boston Consulting Group as an aggregator. Therefore, credit investors would not have access to this information without GP sponsors electing to share it with credit investors. However, the focus of GP investors on reporting core metrics means that the information is being prepared and is available to GPs. At least with respect to the six categories reported under EDCI, it would be reasonable for sponsors to share this information in credit. In order to take advantage of potential synergies, the ESG harmonization initiative that will soon be released for credit markets adopts the EDCI metrics in its core questions. For more information, please contact Tess Virmani.

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