General partners can implement best practices in their firm to effectively communicate their ESG performance with LPs

ESG Disclosure: How to efficiently communicate with Limited Partners

Published: 7 Sep 2022 · Last updated: 30 Sep 2022

In recent years, Environmental, Social, and Governance (ESG) criteria have become key components of value creation for private equity firms. As more and more corporate governing bodies begin to mandate ESG disclosure to varying degrees, Limited Partners (LPs) have begun to take stock of their investments’ sustainability.

Detailed ESG reports can evidence not only previous growth, but also future potential. For this reason, it is more important than ever that these metrics be communicated clearly.

Get to know your Limited Partners

No two limited partners are the same. Every partner has different priorities and different goals. It's important to acknowledge the areas in which your firm's goals align with those of limited partners (GPs). However, transparency is key to any successful partnership.

In the past, ESG disclosures were primarily viewed as a way of cultivating good press and appealing to socially conscious clients and employees. However, ESG integration is increasingly being viewed through the lens of value creation. LPs now use ESG information to determine whether or not a new investment is a responsible venture or a potential risk.

A recent survey revealed that a quarter of limited partners have made the decision to turn down an investment opportunity due to concerns over ESG standards. As more partners begin to involve ESG considerations into their decision-making process, private equity firms must promote their ESG narrative in order to stand out.

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Know the strengths and weaknesses of your fund

Fund managers can't afford to view assets through rose-tinted glasses. No fund is perfect. Limited partners are going to ask questions, and you need to ensure that the data required is accessible and up-to-date.

Any private equity firm looking to attract an investor in a limited partnership capacity should ask themselves whether or not their current limited partner base is aligned with the one they aspire to build in the future. Taking the time to act on this knowledge and make a change can make a real difference in the long run.

Is the information easy to understand? Are you able to access to this data easily? What is this content liable to reveal? Can you provide an example of a success story?

Include as much relevant detail as possible and work to develop and control a cohesive ESG story. Limited partners look to invest in a partnership agreement that will benefit them in the long term. If you are able to share historical data to document your progress, then you’ll be able to evidence a good track record.

ESG metrics then work to showcase the action you have taken to improve ESG attributes. In turn, this enables you to take ownership of your story and be better prepared to answer any questions.

Articulate your ESG strategy clearly

Setting clear ESG guiding principles that the firm will commit to in the long-term is important. Fund managers should work with their firm’s leadership to define and implement them across the organisation. These will guide all communications and become the standards to which limited partners and other stakeholders will assess your level of commitment.

If your firm has signed up to the United Nation's Principles for Responsible Investing, the ESG Data Convergence Initiative or other ESG initiatives, these should be where to start. If you are not a signatory, they form a good basis to formulate your own principles.

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Honesty is key

As a manager, you have a responsibility and an obligation to be honest and direct. By the same token, a limited partner must apply pressure and ask direct questions as part of their due diligence. To help your team prepare for these questions and identify areas for improvement, there are a few things you should ask yourself.

What would you not want a limited partner to ask? What questions would reveal a fund to be a liability? Being honest with yourself when answering this will allow you to notice the problems that exist within your ESG strategy. You can then return to the drawing board for each issue and make them right.

Tackling these problems before a limited partner makes contact will help you to better evidence your successes and ensure you don’t fall at the first hurdle. In making these improvements, you'll also be able to show that your firm has a proven track record of continuous ESG related improvement. Your firm therefore becomes a more appealing prospect.

Communicate regularly and openly

Define a set of measurable and comparable ESG metrics both at the company and portfolio levels and get used to consistently reporting on them, at least annually.

You should consider this reporting exercise as more than just a data collection exercise. Collecting these metrics will help you gather insights that will enrich your portfolio companies’ and firm’s commitments to ESG and achievements story.

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Presenting your data

Many private equity firms struggle to maintain the consistent measurement of metrics over time. Often, metrics vary between each different firm type and, as such, they usually cannot be compared with each other.

KEY ESG's software as a service allows general partners and limited partners to better manage ESG across their portfolios and gather comparable data. General partners are given access at a firm level, and limited partners can view progress across their entire portfolio.

Clear and concise visuals can be instantly exported, enabling fund managers to quickly provide ESG management data for partners, stakeholders, and internal teams. Evidencing a clear understanding of the importance of ESG allows limited partners to gauge a firm’s market position. However, evidencing a robust system for ESG tracking is what can set your firm apart from the competition. It will also reveal your commitment to the guiding principles your company adheres to.

Take the first step towards better ESG measurement

Whether you're looking to make your firm more appealing to limited partners, or you're focusing on ESG disclosure compliance, KEY ESG can help.

Our platform allows fund managers to optimise their ESG measurement processes and create clear visualisations and reports. Book a free demo today to see how our software could level up your ESG processes.

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