The call for more sustainable offerings from limited partners coupled with tightening ESG regulations has posed a significant challenge for general partners (GPs). Their primary concern? Procuring reliable and accurate ESG data from the firms within their portfolio.
Position Green, an ESG FinTech, recently delved into the strategies employed by private market players to gather, communicate, and scrutinise this vital data throughout their investment journey. It also explored the role of ESG in identifying potential threats and opportunities, from the outset of screening and due diligence to the monitoring and eventual exit phases.
The shifting sands of ESG integration in Private Equity
Environmental, social, and governance (ESG) considerations are making waves in investment decisions throughout the financial sector. Morningstar reports a noteworthy trend; sustainable funds constituted nearly 20% of the total fund assets in Europe in 2022. The 2022 ILPA research reinforces this, revealing an 80% of limited partners (LPs) forecast a surge in ESG reporting requests to GPs in the upcoming three years. Given the escalating regulations and amplified demands from LPs, GPs are compelled to accentuate their allegiance to ESG integration. They must also unveil the ESG performance metrics of their portfolio firms.
High-quality ESG data: An uphill battle
The 2023 Verdantix research sheds light on an intriguing shift in the private equity industry’s focus. Historically, the sector prioritised financial yield and the enhancement of governance blueprints of portfolio entities. The present-day narrative highlights the significance of ESG metrics. These are now pivotal, linking directly to short and long-term risks and potential openings. Consequently, obtaining robust and quality ESG data has emerged as both a priority and hurdle for private market participants.
It is imperative that underlying assets assume control and take ownership of ESG data collation and dissemination to meet the escalating expectations of stakeholders. One predominant barrier is the dispersion of vital sustainability subjects across several business sectors. This dispersion intensifies the challenge of accumulating thorough and precise data.
The imperative of ESG data engagement
Regulatory directives like the Sustainable Finance Disclosure Regulation (SFDR) are now stipulating GPs to declare the sustainability metrics of their offerings. This mandate is urging smaller private firms to promptly assimilate ESG reporting protocols. Often, these entities grapple with a knowledge void regarding their specific ESG or sustainability benchmarks. To ensure stringent compliance and dependable data, these businesses must firstly understand the ESG reporting landscape. They must then architect efficient systems for data calculation, acquisition, and management.
GPs are swiftly realising the market’s growing appetite for transparency and accountability. Entities once indifferent to sustainability are now inexorably drawn to ESG data reporting. Early data capture before investments provides GPs with an extended window to refine data quality. It also allows them to incorporate ESG-centric risks into their preliminary action strategies and negotiations.
Position Green’s comprehensive strategy for top-tier data quality and transparency
A significant player, Position Green, is leading the charge to bridge the existing divide between private equity and dependable ESG data. Their prowess in assisting general partners is commendable.
Position Green’s cutting-edge full-cycle investment software offers unmatched support to GPs and LPs throughout the investment lifecycle. This encompasses the gamut from initial screenings to the exit phase. Their system of data acquisition aligns seamlessly with the growth stage of portfolio firms. This ensures flexible reporting structures that are ready for compliance. Their repertoire includes built-in reporting frameworks, disclosures, and best practices. These are ingeniously combined with tailored KPIs, enabling portfolio firms to collate ESG data at a detailed level.
This comprehensive method guarantees top-tier data and insights from every organisational layer. More crucially, it unveils prospective ESG-centric threats, outcomes, and openings. This is instrumental in fostering enduring value creation across portfolios. Position Green stands tall as a trusted ally, fuelling the transformative journey towards unparalleled investment success.
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