Transparent portfolio management: The quest for high-quality ESG data

Faced with a growing demand for more sustainable products from limited partners and a tightening of ESG regulations, general partners struggle to secure reliable and accurate ESG data from their portfolio companies. This article looks at how private market players can collect, report and analyze high-quality data across their portfolio while also identifying ESG risks and opportunities – from initial screening and ESG due diligence to investment monitoring and exit.

Evolving landscape of ESG integration in Private Equity

The integration of environmental, social and governance (ESG) factors into investment decisions has gained significant traction across the financial industry. There is a marked shift in the landscape where, according to Morningstar, sustainable funds accounted for up to 20 percent of overall fund assets in Europe in 2022. A 2022 ILPA study also found that 80% of limited partners (LPs) expect to increase the number of requests to general partners (GPs) for ESG reporting over the coming three years. With increasing regulations and growing demands from LPs, GPs are now under pressure to demonstrate their commitment to ESG integration and provide transparency into the ESG performance of their portfolio companies.

The challenge of obtaining high-quality ESG data

A recent 2023 Verdantix report indicates that while the private equity industry has historically focused on increasing financial returns and improving the governance structures of portfolio companies, there is now an increased focus on ESG metrics due to their connection to risks and opportunities in the short and long term. As a result, access to robust, high-quality ESG data has become a priority and a challenge for private market players.

Underlying assets need to take responsibility and ownership over the ESG data collection and reporting process in order to satisfy rapidly increasing stakeholder demands. A core challenge in accessing and leveraging the underlying data is the fact that the material sustainability topics to be monitored are usually spread across various business units, making it a daunting task to collect comprehensive and accurate data.

The time to engage with ESG data is now

As regulatory mandates like the Sustainable Finance Disclosure Regulation (SFDR) require GPs to account for the sustainability of their products, this is pushing smaller private companies to swiftly adopt ESG reporting practices. There is frequently a gap in understanding and knowledge of what ESG or sustainability is for that specific portfolio company or asset. To ensure compliance and reliable data, these companies must first take action to gain an understanding of the ESG reporting process and implement streamlined structures for calculating, collecting and managing the data in question.

GPs are recognising that transparency and accountability are becoming baseline expectations in the market. Private market players that previously overlooked sustainability efforts now find themselves compelled to engage with ESG data reporting. By capturing data at a pre-investment stage, GPs have a longer timeframe to work with data quality and can embed ESG-related risks in action plans prior to negotiations and investment.

A full-cycle approach to enhance data quality, transparency and value creation

Position Green is working to bridge the gap between private equity and robust ESG data, with extensive experience in supporting general partners. 

Leveraging full-cycle investment software, Position Green supports GPs and LPs during the entire investment cycle with complete transparency – from initial screening and ESG due diligence to holding period and exit. Streamlined data collection is aligned with the maturity level of portfolio companies, which allows for flexible and compliance-ready reporting structures. Built-in reporting frameworks, disclosures and best practices are combined with customized KPIs to guide portfolio companies in collecting ESG data on a granular level.

This full-cycle approach not only ensures qualitative data and insights from all organizational levels and entities, it also identifies potential ESG-related risks, impacts and opportunities, in order to drive long-term value creation within the portfolio. As a trusted partner, Position Green is dedicated to empowering the transformative journey towards investment excellence.

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