A recent report by BSR on the level of environmental, social and governance (ESG) reporting in the private equity industry provides a useful benchmark of the progress that has been made, as well as the ground that remains to be covered.
BSR authors Laura Gitman and Charlotte Bancilhon reviewed the ESG reporting practices of the 10 largest U.S. private equity firms and the 10 largest U.K. private equity firms and made recommendations for improvement. The report concluded that the industry lags behind other financial services sectors in ESG reporting, with only two of those firms surveyed — KKR and Carlyle, both EDF partners — publishing a dedicated ESG report.
Still, BSR noted that 65 percent of the firms reviewed do release some information about their ESG management approach. This comes at a time when "private equity firms are facing increasing scrutiny and greater demand for transparency from investors and stakeholders at large," the report noted. "To secure long-term success, the PE sector needs to adopt a more transparent and open approach to demonstrating how it contributes to social and economic welfare."
At EDF, we were pleased to be included in BSR's research and quoted in the report — and to see the findings covered by writer Thomas Duffell in Private Equity Manager. We agree with the report's conclusion that reporting could be beefed up. Indeed, we fully support enhanced reporting by private equity and we do expect it to spread and become more standardized. Applying the industry's longstanding expertise and rigor to ESG efforts can only improve portfolio company operations and add value for investors.
BSR noted that voluntary initiatives around transparency and disclosure are emerging in the sector and that "ESG factors are increasingly seen as fund value drivers through performance improvements and operational efficiencies, such as eco-efficiencies in portfolio companies." In this competitive fundraising environment, strong ESG management could be a differentiating factor for PE firms.
Noteworthy highlights in the report include the practice of Dutch pension fund APG to define requirements of general partners' ESG disclosure during the fund life, before investing. Also, KKR holds regular ESG roundtables with limited partners and portfolio companies to discuss each of the firm's ESG management efforts.
BSR recommends that firms:
- Use materiality assessment;
- Develop a long-term reporting strategy;
- Establish reporting targets and
- Collaborate with the industry to develop a reporting framework for the entire sector.
Similar recommendations and good additions to the best practices are highlighted in the recent Malk-EDF study on ESG in private equity.