Published: 26 Jan 2023 · Last updated: 26 Jan 2023
Three quarters of private equity funds (75%) are required to report on ESG to LPs, yet 90% of portfolio companies assessed in new study claimed to be unsure how to
Firms can take up to 12 weeks to collect ESG data which can lead to missing reporting deadlines, stalling or failing deals at the point of sale
80% of fund managers noted challenges around extensive ESG questionnaires, with 70% preferring to report on material factors
Geographic differences in regulation and lack of standardization is creating significant confusion amongst managers with 75% of US managers not knowing which European regulations apply to them
London, January 2023 – Despite the rapid growth of ESG in private markets globally, there remains widespread confusion about how to report on ESG data at the portfolio company level – according to a new study from KEY ESG. Surveying over 100 industry participants – primarily within the mid-market – including interviews with both General Partners (GPs) and portfolio companies, KEY ESG found that despite three quarters of funds (75%) assessed were required to report on ESG to Limited Partners (LPs), 90% of portfolio companies surveyed claimed to be unsure how to report on ESG data.
The study found that with many firms taking up to 12 weeks to collect ESG data, missing reporting deadlines, stalling or failing deals at the point of sale are at risk. 80% of GP respondents noted that the extensive ESG questions they receive from their LPs take considerable time to respond to and can use up resources that could be driving ESG improvement at the portfolio company level. However, 70% of the same respondents think there is real merit in getting to a common understanding on which ESG data really matters, so that they can spend more time improving ESG performance and go ‘deeper’ on a narrower set of material ESG metrics to improve quality of assessment, as opposed to simply reporting on a wide range.
Regulatory changes and geographic differences are also creating issues in data collection and analysis even amongst established ESG practitioners. 20% of GPs have already independently started measuring ESG in the last decade but are now struggling to align their in-house methodology with the emerging industry and LP standards. In addition to LP asks, fund managers are struggling with ESG compliance risk, with three quarters (75%) of GPs in the USA stating they are unclear about which Europe-based fund regulations apply to them and by when.
Heleen van Poecke, CEO of KEY ESG said: “What this research has highlighted is that the private market space has significant hurdles to navigate to successfully drive ESG. But it also indicates the relatively untapped potential of the significant impact private equity ownership can have once GPs know what to report on and start collecting granular data to manage towards improvement. Doing this, GPs will not only be better placed to meet ESG regulations and framework requirements as they evolve, but will also understand their portfolio companies better, improve their investment processes and ability to raise funds as well as make better investment decisions.”
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Iola Hopkinson, Marketing Lead
ABOUT KEY ESG
KEY ESG is the end-to-end software solution that helps businesses measure, manage and report Environmental, Social, Governance (ESG) performance by streamlining ESG processes into one user-friendly, cloud-based platform. Aligning industry best practice with up-to-date regulation, KEY ESG's software is built on real data insights that guide businesses and investors through every step of their ESG journey. KEY ESG is an ESGFINTECH100 company. More information can be found here.