Measuring and tracking ESG: Where to start

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Measuring and tracking ESG: Where to start

On 29th June, the KEY ESG team attended the British Private Equity & Venture Capital Association (BVCA) ESG (Environmental, Social, and Governance) Conference in London. This event is new to the BVCA calendar, and the organisers commented that:

The importance of ESG and Responsible Investment has never been more relevant for the private equity and venture capital industry. The ongoing COVID-19 pandemic has reinforced the need to place climate change, health and safety, and other important environmental, social and governmental issues at the heart of the recovery plan

(Source: British Private Equity & Venture Capital Association).

More and more private equity (PE) firms and venture capitalists are beginning to acknowledge the growing importance of environmental, social, and governmental issues. We predict that the number of conferences on ESG management will follow suit in the future.

The panels tackled everything from identifying the difference between ESG and Impact, to building an effective ESG framework.

KEY ESG's Conference Panel

Anne-Marie Schoonbeek, Co-founder and COO of KEY ESG, moderated a panel on Measuring and tracking ESG: where to start?

The panel sought to provide insights on how private equity and venture capital firms could effectively measure and track their portfolio's ESG performance. It offered guidance on how to get started, and it identified the best practices for maintaining effective measurement protocols.

Other members of the panel included:

  • Caroline Löfgren, Chief Sustainability Officer, Hg
  • Ivo Dimov, Carbon Footprint Reporting Workstream, iCI
  • Henry Philipson, Director of Marketing & Communications, Beringea
  • Martin Bresson, Public Affairs Director, ESG Standards Working Group, Invest Europe

In this blog, we share some insights from the panel's discussions. Our insights will help you review your ESG measurement policy. Once you've evaluated the areas for improvement, you can then take action to level up your processes.

Where to start with ESG for private equity and venture capital firms

The importance of ESG has gradually been gaining more and more traction over time. However, for many private equity firms and venture capitalists, it can be increasingly difficult to know where to start.

Beginning your ESG journey

We recommend starting your ESG journey by thinking about your stakeholders. What are their perspectives on ESG?

As a general partner (GP), you need to balance the respective needs of all of them. This includes regulators, limited partners (LPs), your employees, and your portfolio companies.

The difficulty here is deciding what takes priority and ensuring you primarily focus on that, while continuing to keep investors and regulators happy. You must also be mindful that you don't waste operating companies' time as well.

Aligning the desires of various stakeholders can bring about balance, helping you to scale up while meeting their expectations. It's not just about the data. A little bit of research can give you a much better understanding of the base requirements of all those involved. This will allow you to decide on your next step.

What challenges do private equity firms face?

Private equity and venture capitalist firms mainly struggle with two things: implementation and tracking.

Many simply don't have the time, resources, data capacity, and knowledge to begin monitoring ESG effectively. Anything that can be done to streamline the process is invaluable at this stage.

In their first year of ownership, private equity investors should spend time educating their portfolio companies on the importance of ESG measurement. They should also set out how they plan to collaborate to determine a set of metrics that make sense for the specific portfolio company.

ESG as a tool for value creation

Data has repeatedly shown that higher scoring ESG portfolio companies perform better overall. The regulatory bar has been set very high, and private equity is just beginning to catch up. As regulations such as the SFDR continue to establish new rules for companies, compliance becomes more necessary and more difficult. However, investing in your company's ESG future early on can lead to a better return further down the line.

Take a look at our SFDR blog series for more information on how private equity firms can adapt.

Which ESG metrics should private equity and venture capitalist firms measure?

The relevance of ESG metrics differ dependent on the type of investment. Venture capital metrics will be different from those measured for private equity. Earlier stage venture capital metrics will differ from late stage. Growth equity ESG metrics will not be the same as buyout metrics.

Don't just think about what regulatory rulings you need to adhere to, or what you need to do. Instead, think about what's right and material for your business, and treat compliance as compliance.

Ask "What does ESG mean to us?" and "How can we view ESG as an asset to drive innovation and increase efficiency?"

Focus on what's important for your firm in particular. How does this dictate your compliance? Write your own narrative.

Successful ESG Portfolio Reporting

Setting up and successfully reporting on your ESG portfolio requires the consideration of more than just metrics and definitions. But what else dictates success?

Start by aligning internally with your investment teams, your portfolio companies’ management team, and other stakeholders on the frameworks that make more sense to you. Every firm is different. Establish what is the most relevant for you to track.

Assess the risks. What are the ESG levers supporting this strategy? Where are they?

Ideally, the framework you follow should be industry-specific. You can then rank/benchmark portfolio companies to encourage improvement - no CEO wants to be last! Of course, this is easier when your portfolio is made up of similar businesses.

It's important that you set out your expectations. But it's equally important for you to establish the current stage of your portfolio company. You then need to create a plan orientated towards aligning your expectations with the company's reality.

With this in mind, we recommend clearly defining who will be accountable for delivering these results and who will be responsible as these might be different people and functions. Appointing a manager to be accountable for delivering these results - an ESG Lead for example, is considered a best practice across the industry.

Offer incentives for ESG improvements

You have more of a chance of succeeding if all employees are involved and invested. Having the right incentives in place ensures this is the case and keeps everyone working towards the same goal.

A gradual approach is key. But you should always stay flexible.

Establish the top 2 or 3 metrics that fit with your strategy or your business plan. Track them. But remember, these metrics are not set in stone. They won't be the ones you track forever - you might switch it up as progress kicks in. After all, you shouldn't be tracking data just for the sake of it. The metrics you track are likely to change when you set out your plans during the holding period. Expect these changes and embrace them as part of the process.

Some ESG topics will be relevant across the board, regardless of the company's maturity and its industry/sector/market. Think about the metrics you need to track now, but also factor in the progress you want to make over the next 12 months. Tracking aspirational metrics from early on helps you to monitor your progress and report tangible results to stakeholders.

Want to learn more?

We’ve put together a list of helpful guides and resources for you to use to help you to better manage ESG.

KEY ESG software

Our software helps private equity and venture capital firms to easily implement ESG measurement protocols and take control of their ESG narrative. If you'd like the opportunity to do just that, then why not book a demo?

As always, our ESG experts are only a phone call or an email away. Contact us for more information.

Other useful resources to get started with measuring ESG:

  1. KEY ESG Learning and Insights page
  2. The BVCA's ESG trainings and Responsible Investment Toolkit
  3. The UNPRI's technical guides
  4. The D&I ILPA framework
  5. Invest Europe

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