Emerging ESG Standards Put Pressure on PE to Adapt

If we’re going to prevent future pandemics, reduce the risk of climate change, build a more equitable society, and still generate growth, the responsibility lies on our industry to invest in more sustainable economies and systems. However, when it comes to meeting ESG Standards, the pressure is on as PE/VCs fall further behind the ball, despite increasing pressure to adapt. 

From a lack of data at the fund level to the inability to identify risks and align a mitigation strategy, firms are facing a number of challenges in aligning to the ESG standards both consumers and investors are looking for. 

Where the Industry Is Falling Short

In the past few years, there has been a massive shift in consumer expectations toward ESG-aligned values. This includes consumers thoroughly researching a brand before buying to learn how they purchase goods, as well as the companies and merchants they support, to help determine where to spend their dollars. Whatsmore, ESG is commanding more attention at the board level as firms shift to align their investment strategies with ESG values. 

However, PE/VCs are behind the ball when it comes to standardizing data points for what truly deems a brand as ESG aligned, as well as supporting brands that are integrating more sustainable investments, economies, and systems. And, when it comes to reporting on these measures, the industry falls short in relation to effective and transparent ESG metrics – now a key consideration for all private equity investors. 

As the world shifts toward more integrated reporting and auditable sustainability reporting, investors will be forced to produce nonfinancial data according to certain reporting standards. If PE/VCs can’t meet and adapt to the growing needs of their investors, they’re putting themselves at risk of being left behind by the competition.

Rating ESG Performance Is Not a One-Size-Fits-All Approach 

The industry is heading toward standardization in measuring ESG outcomes, and investors are becoming better equipped to ensure firms are putting ESG into practice. However, GPs and LPs have stated that their biggest challenge in rating ESG performance is how unclear it is to standardize, define, and measure overall impact and outcomes, especially given how different industries have varying aspects to measure. As such, LPs and GPs each have their own set of standards when it comes to rating investors’ ESG performance.

For example, measuring the use of carbon emissions to quantify climate impact can be cut and dry. But, when it comes to measuring human rights and labor standards, the data can become pretty gray and is not a one-size-fits-all unit of measurement. As a result, LPs are starting to dig deeper into ESG policies and asking tougher questions about a firm’s ESG efforts.  

A Shift From Compliance to Creating Value 

When ESG standards began gaining traction, PE/VCs were just trying to adopt them and comply. But now, as investors voice interest in valuing funds that offer positive environmental and social impact, they’re leveraging ESG standards and ratings to create value. 

It’s up to PE managers to demonstrate that the ESG initiatives they launched are delivering both financial and nonfinancial returns and to fill in investors on whether or not ESG measures have created value. For example, by adopting SDGs as a framework for achieving positive societal outcomes, PEs can create value by demonstrating a stronger investment through ESG activity.  

By embracing a proactive ESG mindset, transitioning to sustainability can be a lever for positive transformation, and turns ESG alignment into a real business opportunity and lever for growth.

Adapt and Align To ESG Standards With Altvia 

To stay ahead of the industry, firms can leverage ESG standards to create more value for investors, and it starts by setting a strategy to incorporate ESG values into the business’ growth plans. 

Begin with setting a clear roadmap and growth targets for sustainable value creation. At the portfolio level, that includes engaging with management teams to integrate ESG into value creation plans. When sourcing new deals, firms can analyze ESG risks during due diligence and bake in opportunities to value creation plans. 

While there isn’t a standardized common metric to measure ESG standards yet, PE/VCs are leveraging platforms like Altvia so they can gather information at the portfolio level to analyze both financial and non-traditional data to see the full picture. 

To centralize all of your ESG data into one platform, while providing transparency and value-adding reports for investors, contact a member of our team to see how Altvia can help. 

Search
Webinar

Tuesday, February 27th | 1:00PM ET // 10:00AM PT

Join us in our upcoming webinar, “The Power of Unified Data: Creating a Competitive Edge,“ to hear industry experts delve into the significance of data in private capital markets.