Environmental,Social, and Governance (ESG) considerations are vital to the success and sustainability of any organisation, and many private equity firms are legally obligated to monitor their metrics and improve their operations. However, without logical benchmark data, it’s difficult to view a fund or company’s performance in context.
One high emitting portfolio company could be exactly in line with their peers, while another company, while having lower emissions, might be higher than expected for their industry. It’s only through bringing high quality benchmarks that these insights can be understood and strategically harnessed.
The ESG Data Convergence Initiative (EDCI) is a voluntary framework that seeks to standardise ESG reporting to help private equity firms work towards unified goals. The EDCI has partnered with Boston Consulting Group (BCG) to anonymise and organise all of thedata to provide benchmarks for use by EDCI members. These benchmarks have been organised into sectors and sub-sectors, enabling private equity companies to see how their ESG metrics compare to other firms in their field.
Speaking at the Responsible Investment Forum in London on the 8thNovember, Ben Morley, Partner and Associate Director at BCG, spoke of the progress that the EDCI had made since it was founded two years ago:
“The EDCI has brought about a huge improvement in the standardisation of reporting in the private markets and provides a dependable set of six metrics (including 15 underlying data points) to form the foundation of an ESG management strategy for any portfolio.”
The EDCI emerged during the COVID-19 pandemic, when CalPERS and Carlyle brought together a group of General Partners (GPs) and Limited Partners (LPs), all of whom were concerned about various aspects of ESG data reporting in private equity.
Key issues included:
1. Lack of standardisation: LPs couldn't access standardised ESG data across GPs and their portfolios.
2. GP data challenges: GPs faced a growing number of requests for custom ESG data from LPs.
3. Complexity: portfolio companies were struggling to navigate increasingly complex ESG frameworks.
4. Absenceof data: ESG data in private investments was scarce.
To address these challenges, the group evolved from sharing concerns to forming a plan. The EDCI standards were launched in September 2021 as a collaborative effort to establish consistency in ESG reporting in the private markets. Since then, over 350 GPs and LPs have joined the EDCI membership and now report on the standardised metrics.
EDCI promotes the adoption of a set standard of ESG metrics, reducing ambiguity and ensuring that data reported by companies is consistent and comparable. These unified metrics simplify the evaluation of ESG performance.
By adhering to EDCI standards, organisations can more effectively benchmark their ESG performance against industry peers. This allows for meaningful comparisons and enables firms to identify areas for improvement.
The EDCI improves transparency in ESG reporting. Companies that follow EDCI guidelines provide stakeholders with clearer, more reliable ESG data, fostering trust and confidence.
The EDCI aligns with regulatory requirements in various jurisdictions. By complying with these standards, organisations can meet regulatory expectations and avoid compliance-related issues.
Building on the last two years’ worth of data collected through EDCI applications, Boston Consulting Group consolidated thousands of data points to accurately segment ESG data into industry sectors. And the EDCI benchmark is still growing! The submission rate doubled in 2022 and the EDCI scope has now increased to over 4,300 portfolio companies and over 62,000 data points.
All data for each sector is grouped together and averaged, providing benchmarks for private equity firms to grade their portfolio against.
With up-to-date benchmarking standards in place, it’s now easier than ever for firms to assess their performance in comparison to peers in their industry, giving them a better understanding of the standards currently being set.
As a voluntary framework, firms must collect data points themselves and aggregate them into the EDCI’s data submission excel template. Firms must commit resources to this lengthy process.
KEY ESG is at the forefront of providing ESG software solutions to help firms track their ESG metrics and adhere to ESG regulations, including EDCI standards. KEY ESG is one of a small number of firms in the world that is partnering with the EDCI to enabled EDCI members to visualize the benchmarks in their software and submit information direct to the EDCI via API.
Data submission and validation is far more efficient when received through API from a connected platform like KEY ESG. At the tap of a button, all data inputted into KEY ESG’s intuitive dashboard can be submitted to EDCI for validation, without the need to transfer information to an external platform.
EDCI members can view benchmark data in the KEY ESG dashboard, and member firms can use these insights to shape their strategic objectives and their overarching ESG narrative. For instance, fund managers may establish that they are in the top 10% in their field for a certain metric, so they could then decide to push this messaging through their branding. On the other hand, EDCI data may reveal a particular area of general weakness within a firm’s sector, so fund managers could leverage this information to champion progress within their portfolio companies, knowing that excelling in this area will quickly set them apart from their peers.
The ESG Data Convergence Initiative (EDCI) plays a pivotal role in standardising ESG data metrics, making it easier for organisations to report their environmental, social, and governance performance accurately and consistently. By partnering with KEY ESG, organisations can not only meet EDCI standards, but also excel in their ESG reporting and benefit from more sustainable business practices.