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ESG is a growing focus for the private markets, but which metrics matter most?
This is part 2 of a series on ESG investing. View part 1, "Top 3 ESG Trends in the Private Markets."
Environmental, social and governance (ESG) issues have become an important part of the decision-making process for 85% of limited partners (LPs) surveyed by Private Equity International (PEI).[1]
But the increased focus on ESG is not without challenges. While organizations such as the UN’s Principles for Responsible Investment (PRI) and the Institutional Limited Partners Association (ILPA) have developed ESG guidelines, there is no single standard for general partners (GPs) to follow. In addition, limited partners (LPs) are finding it difficult to collect the data they need. According to a recent Morgan Stanley survey, 23% of investors identified the quality of ESG and sustainability data as their top challenge.[2]
In our own surveys of private market participants, including multi-strategy groups, institutional advisors and fund of funds, we confirmed that while investors are prioritizing ESG, GPs and portfolio companies struggle to identify, collect and report relevant data. Nevertheless, we found consistency among LPs on which ESG metrics are typically most relevant to due diligence and investment oversight processes.
The top 10 ESG metrics commonly sought by PE fund investors are:
Collecting and tracking these metrics during the investment lifecycle enables GPs to better manage risk, drive value and exhibit differentiation to LPs. While the process can be cumbersome without technology, platforms such as iLEVEL are bringing these and other ESG metrics into an electronic framework, helping GPs to aggregate portfolio data and making it easier for LPs to benchmark ESG performance with dashboards and other reports.
[1] PEI Perspectives 2019 Special Report, December 2018
[2] Morgan Stanley, Sustainable Signals Asset Owners 2018 Survey, June 2018
This content is provided by an external author without editing by Finextra. It expresses the views and opinions of the author.
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