ESG Disclosure: How to efficiently communicate with Limited Partners

In recent years, the criteria for assessing the environmental, social, and governance practices of companies—commonly known as ESG—have become increasingly important. These criteria help investment firms, like private equity and venture capital firms, make better investment choices by evaluating the potential long-term benefits and risks associated with their investments.

As governments and regulators demand more detailed information on a company's ESG practices, these disclosures have become crucial. They not only help meet legal requirements but also serve as valuable assets to attract and reassure investors or, in this context, the Limited Partners (LPs), about the sustainability and ethical standing of their investments.

Continue reading to learn more about optimising your disclosure practices for better sustainability reporting and ESG performance.

Table of contents

• What is ESG disclosure?
• Why is ESG disclosure important?
• Effective strategies for ESG disclosure with Limited Partners
• Presenting your ESG data
• Take the first step toward better ESG measurement

What is ESG disclosure?

ESG disclosure is the comprehensive process of communicating an entity's impact on environmental, social, and governance factors to stakeholders, including investors and regulatory bodies. 

This transparency is crucial as it allows stakeholders to assess non-financial impacts that influence both the company's financial performance and long-term sustainability. 

For example, Svante, a technology firm specialising in carbon capture solutions, uses ESG disclosures to highlight their significant reduction in carbon emissions. By detailing the effectiveness of their technology in industrial applications, Svante not only demonstrates its commitment to combating climate change but also strengthens its position in the market for potential investors and partners focused on sustainable technologies.

Similarly, A.P. Moller Capital, an investment firm, utilises ESG reporting to showcase its efforts in enhancing infrastructure in emerging markets. Their reports include detailed assessments of their initiatives to improve access to clean energy and sustainable transportation, directly contributing to local economies and social well-being. This transparency supports A.P. Moller Capital's strategy to attract investors who are keen on sustainable development and ethical investments.

Both examples underline how tailored ESG reporting, supported by KEY ESG’s platform, not only addresses regulatory requirements but also enhances stakeholder confidence in the firm’s dedication to ethical operations and sustainable growth strategies. This approach aligns with disclosure regulations from entities such as the European Union and the Securities and Exchange Commission, emphasising the role of ESG disclosures in a comprehensive sustainability framework.

Why is ESG disclosure important?

For Limited Partners, ESG disclosures offer a lens through which their investments' sustainability and ethical implications can be evaluated. These disclosures help LPs:

Identify risks and opportunities

ESG disclosures allow LPs to uncover potential risks and opportunities that traditional financial metrics might overlook. This can include environmental risks associated with climate change, social injustice issues that could affect brand reputation, or governance risks tied to corporate boards. By having a clearer picture of these non-financial metrics, LPs can better gauge their investments' sustainability and ethical footprint.

Regulatory compliance

As global regulations around sustainability tighten, such as those enforced by the European Union and the Securities and Exchange Commission, ESG disclosures become crucial in ensuring compliance. These reports help avoid potential legal and reputational risks by demonstrating that firms adhere to required disclosure standards and responsibly manage environmental impacts and governance issues.

Enhance investment decisions

ESG disclosures integrate critical ESG data into the investment process, enabling LPs to make more informed decisions that reflect their values and sustainability goals. Asset managers and investment managers use this information to evaluate investment products and ensure they meet the sustainability criteria demanded by today's market.

Stakeholder assurance

Effective ESG reporting, typically found in sustainability and annual reports, builds trust and transparency between General Partners (GPs) and LPs. This assurance is vital in maintaining strong stakeholder relationships and confirming that business practices adhere to high ethical governance and social responsibility standards.

Broader impact

By disclosing sustainability information, companies contribute to a sustainable economy by addressing key reasons for concern, such as total carbon emissions, human rights, and the negative impacts of corporate practices. These disclosures are essential for public companies, large companies, and all organisations aiming to communicate their commitment to sustainability effectively through sustainability reporting.

Effective strategies for ESG disclosure with Limited Partners

Effective ESG disclosure to Limited Partners involves not just transparency but clear, strategic communication. Establishing a strong ESG reporting framework is crucial for consistency, comparability, and aligning with recognised standards such as the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), or the Task Force on Climate-related Financial Disclosures (TCFD).

Below are a few things to bear in mind when it comes to building effective strategies for ESG disclosure with Limited Partners:

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. 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.

Know the strengths and weaknesses of your fund

Fund managers need to objectively assess their funds, recognising that no fund is without flaws. It is crucial for Limited Partners (LPs) that the information provided is not only current but also comprehensive and accessible. A private equity firm must continually evaluate whether its existing LP base aligns with the one it aims to cultivate, making strategic adjustments as necessary.

For effective communication, it is important to ask: Is the provided information understandable? Is it readily accessible? What insights or potential issues does this information expose? Sharing success stories can serve as practical examples of a fund’s capabilities.

Incorporating detailed ESG metrics into reports not only showcases your efforts to enhance ESG attributes but also helps in building a cohesive and robust ESG narrative. This is essential for LPs who are increasingly looking to invest in funds that not only promise but also demonstrate long-term benefits. By documenting and sharing historical data, funds can highlight their track record of improvement and adherence to ESG commitments.

This approach involves continuously updating ESG factors in sustainability reports, ensuring all ESG disclosures meet the legal requirements and disclosure requirements set forth by entities such as the CFA Institute and the European Parliament. Regular updates to financial statements and the annual report, enriched with sustainability information and ESG issues, help maintain transparency.

Articulate your ESG strategy clearly

Setting clear ESG guiding principles that the firm will commit to in the long term is important. Articulating your ESG strategy with clarity is pivotal for setting the tone and expectations for both internal stakeholders and Limited Partners (LPs). Fund managers play a crucial role in aligning their firm's leadership around a set of well-defined, long-term guiding principles that govern ESG practices. These principles not only guide all communications but also serve as the benchmarks against which LPs and other stakeholders measure the firm’s commitment to ESG goals.

If your firm is already a signatory to global ESG initiatives such as the United Nations Principles for Responsible Investing or the ESG Data Convergence Initiative, these commitments should be prominently highlighted as they provide a solid foundation for your ESG narrative. For firms not currently aligned with such initiatives, these frameworks offer a structured approach to developing your own robust ESG principles.

Emphasising the critical role of clear communication in ESG strategy cannot be overstated. Effective communication entails defining ESG objectives and transparently sharing the specific actions and initiatives undertaken to meet these goals. This clarity and consistency in ESG communication are essential as they underscore accountability and enhance transparency, which in turn fosters greater confidence among LPs.

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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 firms’ commitments to ESG and achievements stories.

Presenting your data

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

‍KEY ESG's software allows general partners and limited partners to manage ESG across their portfolios better 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.