Searching for harmony

By Dörte Höppner, chief sustainability officer at the Riverside Company.

It's no exaggeration to say that, during recent years, there has been an explosion in the volume and breadth of ESG data requests in private equity. We have moved on from merely responding to ad hoc LP requests for ESG information, to a market characterised by a number of different frameworks and standards.

There are three levels of ESG standards and frameworks. First, those that are developed within the private equity industry – a ‘from the industry, for the industry’ approach. Then there is the global sustainability framework universe, which goes way beyond our industry but will of course impact private equity as well. And then we have the regulatory frameworks for private markets that include sustainability matters. Welcome to the new normal.

In an ideal world, there would only be one standard that serves all purposes. And by looking at the aforementioned levels in more detail, it becomes clear that this standardisation is very much underway. At each level, there is a clear trend to agree on one single protocol. But the very nature of each level serves a different purpose. For that reason, we will continue to deal with several sustainability standards. Let’s have a brief look at each level.

Competing standards

The ESG Data Convergence Initiative (EDCI), launched in 2021 by a group of large private equity GPs and LPs, defined a set of ESG metrics and aims to create a critical mass of ESG data from private companies. The initiative has grown impressively and now counts more than 325 members. In my view, the EDCI is a blessing for the industry and will hopefully become the new industry standard. EDCI makes our lives so much easier, as GPs only need to prepare the ESG metrics once. In addition, GPs and LPs can benchmark their portfolio against the aggregated portfolio metrics within the EDCI.

But there is more sustainability reporting to do for our industry. Enter the EU Sustainable Finance Disclosure Regulation with its Principal Adverse Impact Indicators – an impressive set of ESG metrics that GPs need to report on to the regulatory supervisory authorities. It would be very much in the interest of our industry if regulators across the world would coordinate with regards to private markets regulation.

The final level of ESG standards are international accounting and reporting standards. There has been a lot of movement in this field during the last two years; one of the most established global frameworks, the SASB Standards, is now part of the International Sustainability Standard Board (ISSB), which was only created in 2021 by the IFRS Foundation. SASB Standards are used by many in our industry as they are relatively easy to apply when identifying and managing material industry-related ESG risks. The ISSB recently confirmed that it will update and improve the SASB Standards.

Industry standard

The private equity industry will continue to call for harmonised reporting standards. And while this is a fair ask, it is unlikely to happen as there are too many parties and interests involved. However, at an industry level – so at the first level outlined above – we can all support the EDCI framework to have at least one single voluntary industry standard.

Also, sustainability reporting will get easier as we harness new technologies to enhance our operations. Integrating tech into our reporting systems allows us to respond to reporting requests of all kinds in a more efficient way. The so-called ‘back offices’ of our industry will become true powerhouses fuelled by technology.