Private equity sponsors and lenders align to standardise ESG disclosure during due diligence

As private companies’ disclosure of ESG information remains limited, investors continue to struggle to compare their relative ESG performance. Combined with a proliferation of industry standards and reporting requirements, alongside greater regulatory scrutiny of ESG practices, this further complicates ESG investment practices in private markets, despite broad commitments to responsible investing among sponsors and lenders.

To address this challenge, infrastructure and initiatives to support and streamline comparable ESG disclosure among private companies have been burgeoning in recent months. This autumn we have seen many new developments, including:

• BlackRock adding a new ESG outreach module via its eFront Insight platform for private markets;
• Ford Foundation, Omidyar Network, Hamilton Lane, and S&P Global launching the Novata ESG platform; and
• The ESG Data Convergence Project led by leading general partners (GPs) and limited partners (LPs) including CalPERS.

While an important sign of progress, these resources are focused on standardising and streamlining post -investment ESG monitoring and reporting. To improve quality of ESG data post -investment, we need better ESG disclosure pre -investment.

During the pre -acquisition phase, access to quality ESG information remains spotty at best. The absence of norms for sharing ESG data among sponsors, lenders, co-investors and bankers discourages managers from requesting ESG data on prospective companies during diligence – for fear of being viewed as ‘non-commercial’ or delaying already tight closing timelines. In turn, companies do not provide quality, timely ESG data because the information is not routinely tracked.

In response to this, the Principles for Responsible Investment (PRI) has been working to facilitate disclosure and create new norms for proactively sharing ESG information among private equity and private credit investors. The effort centers around a new general partner-level ESG standard due diligence template, which aims to standardise the ESG information shared during the investment process and integrates existing ESG standards and frameworks (instead of adding to the alphabet soup). This work draws on extensive existing guidance regarding ESG best practice for private equity and private debt investors and is the result of ongoing consultation with these players.

What’s new in the PRI’s template – and how is it different from existing resources?

At its core, the template recognises that, without data, no firm can live up to its ESG commitments and, critically, disclosure should begin at the first phase of the investment cycle: due diligence. At a high level, the template:

• Provides standardised minimum disclosure guidance to help private companies prioritise ESG data during the diligence phase.
• Draws on standard industry reporting frameworks and identifies when disclosure is aligned with these frameworks, including the Sustainable Accounting Standards Board (SASB), the Loan Syndication and Trading Association (LSTA)’s ESG questionnaire, the Task Force on Climate-Related Financial Disclosures (TCFD), CDP, the EU Sustainable Finance Disclosure Regulation (SFDR)’s Principle Adverse Impact indicators, the Institutional Limited Partners Association (ILPA)’s diversity metrics and the more recent Novata, e-Front and ESG Data Convergence Project indicators.
• Enables a broader set of stakeholders to be stewards of ESG data, including lenders, co-investors, consultants and bankers (i.e. the entire ecosystem should steward disclosure and better data and access).
• Limits redundancies, increases efficiencies and breaks information asymmetries as well as timing mismatches that currently exist in private markets among the various stakeholders.

This initiative marks the first time that PRI has convened private equity and private debt players to explore opportunities for greater alignment and create synergies on ESG. It builds on the initial steps taken by two PRI signatories, Kohlberg & Company and Churchill from Nuveen. In early 2021, both firms were attempting to calculate the carbon footprint of a portfolio company that Kohlberg & Company (the sponsor) owned and Churchill from Nuveen (the lender) financed. This collaboration led to the development of the template that was later enriched and improved upon thanks to the input from a working group of an additional 20 signatories. PRI also led one to one calls with selected reporting organisations to seek common ground.

What’s next?

We are now entering an exciting new phase, as the working group will begin testing the template on live deals starting this month. After another round of signatory feedback to improve its usability, the template will be made available as a public good on the PRI website in early 2022. The template is designed to complement and feed into in-house and external frameworks (commercial and public), by standardising minimum disclosure requirements and leveraging existing industry standards.

We do not expect companies to be able to respond to all indicators at this stage. However, understanding where disclosure is lacking is a valuable ‘indicator’ in itself – enabling investors to identify gaps and support portfolio companies to improve ESG disclosure throughout the investment lifecycle. We also call on investment banks and ESG consulting firms to help institutionalise these practices. The PRI intends to approach these stakeholders for broader outreach and we encourage all private equity and private debt players to join us on this journey.

This blog is written by PRI staff members and guest contributors. Our goal is to contribute to the broader debate around topical issues and to help showcase some of our research and other work that we undertake in support of our signatories.Please note that although you can expect to find some posts here that broadly accord with the PRI’s official views, the blog authors write in their individual capacity and there is no “house view”. Nor do the views and opinions expressed on this blog constitute financial or other professional advice.If you have any questions, please contact us at [email protected].