Data & Intelligence
Environmental, Social, and Governance (ESG) Reference Guide
Posted On: 29 Apr 2016
In the age of transparency, ESG reporting has evolved into a common practice for private equity practitioners in emerging markets, as evident by the shift in the dialogue around ESG. Instead of speculating over the value of ESG reporting, practitioners are instead engaging around strategies to enhance the quality and value of their reporting activities. In this new reporting age, what trends and best practices can be gleaned from the myriad of current reporting approaches, resources and tools? What lessons can be learned from the practitioners active in the space? This section summarizes learnings from the EMPEA Councils ESG Reporting Initiative, specifically drawing on insights from interviews with various EMPEA Members, including LPs, GPs and industry advisors.
Best Practices in ESG Reporting
Good ESG reporting is not the driver nor end goal, rather it is an outcome of a firm’s effective ESG management system. As James Magor, Manager of Responsible Investments for Actis states, “If reporting is seen as the end goal, that isn’t best practice.” Dr. Samantha Lacey, ESG Manager for CDC Group plc, expands this statement, “Ultimately good ESG reporting has to stem from decent ESG management at the fund manager and portfolio company level. ESG reporting is not the be all end all nor the driver. The drivers should be identifying the risks, impacts and opportunities and managing those well. If you do that reporting should be easy.”
Applying appropriate and insightful metrics is key to achieving relevant, actionable reporting data. Rather than simply relying on an extensive list of generic metrics, an organization’s reporting metrics should reflect the sectorial, geographical and contextual nuances of the investment portfolio. According to James Magor of Actis, “A core set of particularly insightful metrics supplemented by investment-specific data points is best practice rather than an exhaustive list of generic metrics or a checklist approach.”
Building upon this, EBRD suggests that principles for good reporting both to internal and external stakeholders involve focusing on materiality, selecting and compiling reports consistently and accurately. In terms of materiality, a firm must determine and report on what is relevant and vital from both the investee company and investor perspective.
Realizing the full returns of ESG reporting requires practitioners to: 1) integrate ESG early on and throughout the investment life cycle; 2) develop a baseline assessment to evaluate future impact; 3) conduct meaningful data analysis; 4) diligently follow up with all related stakeholders.
Incorporating ESG initially and throughout the investment lifecycle (from due diligence to exit) maximizes the ESG investment, and provides greater opportunities to create value and enhance carry, according to James Brice, Managing Director for EBS Advisory. “The later the ESG involvement is left in these investment activities, the lower the opportunity for ESG to enhance carry. We have evidence that ESG can shift carry well above the 15% estimated by one DFI. We have seen numbers of 16% and higher, even above 17% for some assets with high ESG exposure.” Brice also suggests combining a social and environmental baseline assessment with the due diligence risk assessment. Doing this will provide a baseline against which any further impact (both positive and negative) generated by the asset can be measured. Conducting these assessments together also utilizes the firm’s resources efficiently by maximizing the value of having an independent ESG professional on the site.
Measuring and reporting on ESG information is only helpful if there is analysis and follow up behind it James Magor of Actis explains. Information analyzed should also be used to “set objectives with meaningful actions to achieve those objectives.”
According to Dr. Lacey of CDC, “For larger funds or those with high E&S exposure, we find that having in-house E&S expertise and then using consultants for the technical issues can be quite effective.”1 Felipe Albertani, E&S Development Specialist for IFC agrees, “Some funds hire full-time E&S specialists and that is a good indicator of success. Training fund staff and employing qualified consultants with the appropriate expertise is also critical.” Employing consultants to carry out specific elements of this work does however put the onus on the fund to follow up with the consultant around specific action items. It is also critical that any in-house E&S experts work in tandem with the investment team to ensure effective ESG management implementation, according to Dr. Lacey of CDC.
Prasad Modak, Dean of IL&FS Academy for Applied Development (IAAD), suggests that LPs looking to build out their program should also “engage third party experts to carry out independent evaluation of implementation of ESG.” Related to this, a North American public pension fund emphasizes that an “ESG program should be incorporated throughout the organization and across all asset classes.”
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Rashad Kaldany | Executive Vice-President and Growth Markets, CDPQ
David Rubenstein | Co-Founder and Managing Director, The Carlyle Group