This article was originally published by the Denver Business Journal. To read the original, click here.
Nearly 90% of limited partners (LPs) say environmental, social and governance (ESG) is a factor when evaluating private equity managers, according Private Equity International’s 2021 survey, up from 81% the prior year. While investor relations professionals may be aware of ESG’s importance in LP investment decisions, many firms are still found scrambling when their investors come calling for proof of progress on ESG targets. The job becomes an even bigger challenge when asked to provide detail beyond the metrics.
That’s because firms rarely go beyond ineffective systems like Excel spreadsheets or email communication when it comes to tracking ESG initiatives. The lack of standardized ESG data can compound the problem, forcing investor relations professionals to try and consolidate disparate data across different companies, sectors and funds. On the other side of the equation, it is easy to lose track of any ESG promises once made to LPs or even to identify which LPs prioritize ESG initiatives and to what extent.
Technology can help get an LP to commit to capital
All this means one of the most important factors in getting an LP to commit capital is one of the hardest to address. The good news is that technology can help.
While the “old-school” alternative investment industry is quickly becoming more socially conscious, it’s also undergoing a digital transformation, embracing new tools that enable firms to directly show investors how they’re tracking on ESG goals, within individual funds or inside specific portfolio companies. While this information may seem like just an added perk, it’s important to keep in mind that LPs have attempted to form legal cases against GPs that failed to follow pre-set investment mandates, and now in Europe, private fund sponsors must comply with an ESG disclosure regulation.
Because of these implications, it’s important to choose a software solution that can be used to track firm-wide ESG initiatives and assist with automated reporting that keeps LPs — and the internal team — up to date. Using DealCloud Dispatch, for example, investor relations (IR) teams can send surveys to prospective and existing LPs to gauge their views on how they weigh ESG in their investment calculation and what factors matter most.
The impact of ESG tracking and reporting
When firms lose tabs on ESG baselines and goals, they’re in essence losing the trust of their investors, 81% of which report on ESG matters to their boards at least once a year, according to a 2019 survey from PwC. That’s why pre-formatted reports and ESG reporting across funds and portfolio companies enable firms to let their LPs know of progress relative to their most important KPIs – effectively building credibility through reports that can be set to send monthly, quarterly or annually.
The impact of strong ESG tracking and reporting goes beyond LP communications. More and more, financial media outlets are writing about whether investment firms are good corporate citizens. Being able to quickly access real-world data that demonstrate how your firm is advancing on the environmental, social and governance fronts can be a critical tool in enhancing your reputation when caught in the media spotlight.
Finally, better insight into ESG across the portfolio can improve investment and operations strategies. This requires accurate ESG data, which can all be accessed quickly via a single, centralized location. It’s easier said than done because ESG factors vary greatly by industry, but the right technology can help.
Don’t let the ESG wave pass you by.