For Private Equity (PE) firms, addressing environmental, social, and governance (ESG) considerations has become increasingly important as investor demand for sustainable and responsible investment funds intensifies and the regulatory landscape continues to change.
This brings new reporting challenges to PE firms, both for their investments and within their own businesses and investment processes.
Related Article | The UN-backed Principles for Responsible Investment (PRI)
In this blog, we offer an alternative approach to solving some of the most pressing ESG integration challenges for PE firms and their portfolio companies:
- Engaging with portfolio companies on their ESG practices
- Reporting on those investments’ ESG progress and performance against expectations and comparable companies
- Turning ESG policies and reporting into actionable and strategic insights
Related Article | The Ten Principles of the UN Global Compact
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Challenge #1: Reporting and transparency
Many portfolio companies, especially those at an early stage, will not have the capacity or knowledge to determine and implement an ESG policy nor the ability to develop ESG reporting. Collecting this information is, therefore, a big headache for investors mandated to report on their exposure to sustainability indicators.
Specialist CFOs from iFD can create an ESG measurement framework that reflects the portfolio company’s values and objectives—coupled with the delivery of well-structured insights based on accurate data analysis to the PE firm and stakeholders, enhancing their value and investment returns.
Challenge #2: Performance management
Measuring ESG performance and how well a company or investment performs extends beyond figures; it’s about measuring the full impact of their ESG practices, many of which aren’t quantifiable.
With an ESG reporting dashboard seamlessly integrated into the standard performance management routine of the portfolio company, ESG compliance and best practices become a cultural norm rather than a one-time task.
Challenge #3: Focusing on what is important
PE firms operate across diverse industries, each with its own set of environmental, social and governance (ESG) factors that are material and relevant. Accurately pinpointing the ESG factors that matter most for specific investment opportunities within the portfolio requires time, experience and a structured approach.
A CFO experienced in this area can quickly assess what is relevant, material and can be practically determined in ESG reporting. They will strike a balance between addressing ESG concerns that affect financial performance and addressing ESG issues that align with stakeholder expectations.
Challenge #4: How is ESG integration done?
Balancing the interests of employees, communities, and investors while embedding ESG principles into a portfolio company’s operations requires careful consideration.
A specialist CFO will assess all stakeholders’ ESG goals and identify the appropriate data sources before developing the reporting and KPIs to guide strategic planning.
This reporting will also inform messaging and continuous improvement.
Challenge #5: Managing ESG risks
ESG risks can disrupt both reputation and financial stability; for example:
- The impact of carbon consumption: inefficiencies cause unnecessary expenditure.
- Enhancing governance is an imperative for scaling PE-backed businesses. Poor governance equals poor growth and erodes value.
- Competitors will be focused on ESG.
- Progressive companies will attract and retain the best people and customers.
The ESG challenge is how to implement change in a practical, pragmatic way. We have been doing that in finance and HR for 20 years.
We have a demonstrable track record of working alongside a PE-backed client base and have been the go-to solution for our growing number of PE-backed clients.
If you think we can help, please feel free to use this link to book an appointment with Sam Akhtar
Author’s Biography
Written by Matt Smith, Senior Digital Marketing Associate at Isosceles.
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