ESG, private capital, explanation

ESG Transparency in Private Equity – Definition and Solutions

In this article the following questions will be answered:

  1. What is ESG?
  2. What roles does ESG play in Private Equity?
  3. What is responsible investment?
  4. What is the difference between ESG and Impact Investing?
  5. How can ESG transparency for Limited Partners be achieved?
  6. Which market standards / frameworks exist for ESG information?
  7. Why is ESG risk management necessary?
  8. How can ESG risks and opportunities be identified, managed and monitored?

What is ESG? 1

Environmental, social & governance are three central factors in measuring sustainability and ethical impact within a company.

What roles does ESG play in Private Equity? 2

Private equity investing is especially suited for taking ESG factors into account due to its long-term investment horizon and often active ownership role.

What is responsible investment? 3

Being a PRI Service Provider Signatory AssetMetrix uses and incorporates where possible their definition: The PRI (Principles for Responsible Investment) defines responsible investment as a strategy and practice to incorporate environmental, social and governance (ESG) factors in investment decisions and active ownership.

What is the difference between ESG and Impact Investing? 4

Impact investing is an investment strategy aiming to have a positive environmental or social impact i.e. investing in companies that sell products and/or solutions with the intent to have a sustainable impact. ESG focuses on the environmental, social & governance factors in a company’s operation and it can be used in addition to measure and enhance risk management.

How can ESG transparency for Limited Partners be achieved? 5

To gain full ESG transparency it is important to take both the fund managers (GPs) and the portfolio investments into account. Specialized service providers, such as AssetMetrix, have to offer a seamless and efficient setup and support Limited Partners (LPs) to collect the appropriate documents from their fund managers and derive ESG scores, ideally, from the portfolio data they already have. As a Limited Partner it is not always easy to continuously request data from GPs. For this reason, it is helpful and more efficient when the solution builds on data that is usually already available to limit the data requests to GPs to the minimum necessary.

Which market standards / frameworks exist for ESG information? 6

There are numerous players on the market. AssetMetrix has, after thorough research, chosen to focus on the United Nations’ Sustainable Development Goals (UN SDGs), the Sustainability Accounting Standards Board (SASB) and the Institutional Limited Partners Association (ILPA).

  • UN SDGs: 17 goals to be reached by 2030, scored, from 0-100, by a country’s progress. They provide a blueprint for peace and prosperity for people and the planet, now and in the future and are well known within the private capital space.
  • SASB: focuses on financially material information & defines industry-specific material issues across ESG topics. SASB has developed a framework consisting of 10 sectors split into 77 industries with 26 material issues sorted into 5 ESG dimensions.
  • ILPA: engages, empowers & connects LPs to maximize their performance. ILPA is dedicated to promoting transparency and uniformity in disclosures to LPs and has, among other, developed the LP DDQ ESG Template in cooperation with the Principles of Responsible Investment (PRI).

Why is ESG risk management necessary? 7

ESG risk management is becoming a must. Not only is there a collective responsibility to act – regulators are responding and are demanding more transparency and disclosure. The regulation on “sustainability-related disclosures in the financial services sector” published in December 2019 makes this a fact and defines “harmonized rules for financial market participants & financial advisers on transparency with regard to the integration of sustainability risks… .”

The regulation will apply from March 2021 with the exception of disclosures in regulatory reports that will apply from January 2022.

How can ESG risks and opportunities be identified, managed and monitored? 8

To identify ESG risks and opportunities it is very important to have data and documents structured and stored in a central repository. This allows for one source of truth and continuous tracking and monitoring of data. Further, it is necessary to have an efficient way to collect the data and documents needed on a regular basis. Lastly, a structured process is required to adequately identify the relevant risks.

All the above is offered in AssetMetrix’ ESG Transparency service module for Limited Partners. With minimal effort the solution provides ESG transparency on manager and portfolio level:

  • manager score based on assessment of ESG commitment and efforts
  • portfolio score based on country and industry of underlyings – without any additional data collection

Need more information?

We will be happy to present our "ESG Transparency" module in detail and show you how our solution provides ESG transparency at manager and portfolio level with minimal effort. Get a demo!

AssetMetrix is Europe’s leading next generation asset servicer. We offer modular outsourcing solutions for private capital investors: front-, middle- and back-office solutions for Limited Partners and General Partners.

Our services enable private capital investors to free up their own resources for making investment decisions, benefit from our secure IT system and state-of-the-art analytics, and increase in-house transparency for optimal decision-making.

AssetMetrix has more than 20 years of experience as a service provider in institutional capital investment and operates without conflicts of interest. AssetMetrix is not an investor, an investment consultant, or a placement agent, but currently administers portfolios with a total volume of over €12 billion and more than 1500 funds.