ESG in Private Equity

The role of ESG in private equity is expanding

Once relegated to the public markets, ESG’s role in private equity grows by the day. Increased investor demands and an evolving patchwork of regulations have spurred GPs to action and, as a result, the private equity industry has surged forward.

At Allvue, we believe ESG priorities to be a pillar of our industry, our clients’ needs, and our own core values.

We are excited to embrace the continued evolution of the industry.

ESG’s impact on the global institutional investing world has reached new heights – not only in the public markets but also in private equity.

According to Preqin, more than one-third of global private market assets are overseen by firms committed to ESG investing.

So as investors and managers increasingly view their private capital investment decisions through environmental, social, and governance lenses, the demand for ESG solutions purpose-built for the private markets has steadily climbed.

This high demand for ESG & private market solutions is particularly driven by data. Data is at the center of any ESG initiative – but when it comes to the private markets, portfolio and market data is notoriously difficult to unlock.

At Allvue, our asset class-agnostic solutions are built to serve as a single source of truth when it comes to their asset managers’ and institutions’ private market portfolios, all with an eye to their ESG impact and goals.

While ESG in private equity has become a crucial topic, it’s a lens that requires copious amounts of data. The private markets are known for their lack of data transparency when compared to other asset classes.

But for market participants committed to enhancing their data collection and analysis capabilities, no matter whether they fall on the LP or GP side, there is plenty to explore and optimize when it comes to ESG in private equity. This is especially the case as regulators across the globe begin to pay closer attention to how LPs and GPs account for and make claims about their responsible investing progress.

ESG is transforming KPI collection

Data is the foundation of ESG. ESG KPIs – or key performance indicators – are trackable figures meant to help firms understand the environmental, social and governance impact of their operations. It’s crucial that firms understand which ESG KPIs make sense for them to collect based on which industry or lens they are viewing their ESG impact through.

As LPs originate the push for greater ESG attention, awareness, and action within the investment community, they do so by requesting ESG KPI reporting from their GPs. Especially as investors in Europe are facing regulations such as the Taxonomy Regulation and the Sustainable Finance Disclosure Regulation (SFDR), the ability of a GP to report on ESG considerations is quickly becoming a legal essential for many large LPs.

While KPI reporting may sound like a simple-to-tackle operation at face value, the open-endedness of ESG KPIs can quickly make things overwhelming. Between the environmental, social, and governance facets of the ideology, the number of possible KPIs tracked can easily climb into the hundreds.

For firms looking to get a head start, download our complete list of ESG KPIs here.

ESG is transforming the regulatory landscape

Regulations fueling ESG in private equity and combatting greenwashing are also an essential area to watch in the investing world right now. Regulatory bodies across the world are paying close attention to how the investing industry adopts and interacts with ESG ideas, including how they may try to take advantage of ESG as a trend.

While increased regulatory attention to ESG helps to create clarity and guardrails which encourage greater market participation, the fact that key markets, such as Europe and the U.S., don’t quite sit on the same page from an ESG regulations perspective can create hurdles for managers and investors who invest on a global basis.

ESG is transforming LP due diligence

Often the pressure to adhere to ESG principles starts with LPs. Many institutions maintain their own internal private equity ESG policy that lays out the guardrails for what kind of responsible investing impact they want to have and how their portfolios adhere to those goals.

But understanding how to kick off your ESG strategy as an LP can be daunting. Whether you’re at the outset or trying to understand whether your firm is on the right track, LPs should ensure they have these foundations steps in place:

• Establish your own ESG policy. Determine what qualities across each ESG category mean the most to your institution as well as which qualities you feel pose the most risk to performance or your future portfolio goals.
• Adopt an ESG due diligence checklist. The Institutional Limited Partners Association (ILPA) shares many helpful, free resources to help investors build ESG considerations into their investment decision-making process.
• Use technology to keep track of the data by prospective and current manager. Ultimately, your tech must be flexible so that it can change with the evolving space of ESG.

Discover how Allvue can help you hone your ESG strategy

Data is at the heart of ESG, and in the private equity realm, that is easier said than done. For an umbrella of asset classes that inherently lacks transparency, especially when compared to public markets,

Our mission at Allvue is to empower superior investment decisions by easing collection and anlysis of your data, including when it comes to the ESG facets for your investments decisions.

Reach out today to learn more about how Allvue can help with your private equity ESG data needs.