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As the prominence of ESG in private equity has grown, institutional investors’ embrace of ESG KPI tracking has taken hold, and private equity and venture capital managers are sure to feel the shift. In fact, in a survey of LPs, Bain & Company found 93% would walk away from a GP investment due to ESG reasons.
For some managers, ESG is a totally new ballgame. Others may be well-versed on the topic, have a defined ESG investing policy to provide during ESG due diligence reviews, and yet are still getting asked by investors for additional ESG KPIs to be tracked.
Whether your firm is looking to improve its KPI tracking abilities or starting to track ESG KPIs for the first time, understanding what metrics filter into investors’ ESG goals is a foundational step. The next step is mastering a way to collect and report on that .
What is an ESG KPI?
ESG key performance indicators, or KPIs, are trackable figures meant to help firms understand the environmental, social and governance impact of their operations. For venture capital and private equity managers, ESG KPIs are integral in understanding the ESG impact of the companies they invest in or are thinking about investing in, and thus the impact of their funds.
ESG KPIs also provide managers and investors with an idea of what risks their investments and funds face. Investors are increasingly expecting these ESG metrics to be reported on by 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.
What are some examples of ESG KPIs?
When thinking of ESG KPIs, a few common metrics most likely come to mind first, including:
- Greenhouse gas emissions – With climate change as a top issue in today’s society, greenhouse gas emissions are naturally the most considered ESG KPI. Measured in CO2e, or carbon dioxide equivalent, these gases, including carbon dioxide, methane, nitrous oxides, and others, become trapped within the atmosphere and are responsible for warming temperatures and adverse weather effects across the globe. For environmental as well as reputational sake, organizations should want to shrink this number as much as possible.
- Employee working conditions – Retail brands are often under the microscope for the labor conditions maintained for any factory work, especially as fast fashion brands continue to take hold. Here, data such as the number of injuries sustained or hours per week worked by the average factory employee can help to provide a picture of working conditions from an ESG standpoint.
- Workplace and leadership diversity – As the focus on DEI (diversity, equity, and inclusion) initiatives has grown in the last few decades, tracking metrics across an employee base is a key element of the social lens within ESG. Tracking the percentage of employees of color, female employees, and LBTQIA+ identifying employees within the company, as well as in leadership and board positions, can reveal a company’s ability to foster a successful and diverse workplace.
However, it’s important to remember that ESG is a broad concept for which data is essential, and comprehensive ESG KPI tracking goes far beyond these commonly thought-after figures – especially when analyzing portfolio companies across many different industries.
For example, a digital payments portfolio company and a natural gas portfolio company, being such fundamentally different businesses, can’t be compared as apples to apples and would require different weighting against different ESG KPIs.
To get an idea of the full ESG KPI landscape by industry, download our comprehensive ESG KPI list below.
How do I select and start tracking ESG KPIs?
Selecting and tracking ESG KPIs for your firm or portfolio companies, while also taking action to work toward your ESG goals, is a complex integration of efforts that often requires the assistance of specialized technology and the expertise of external consultants. However, when getting acquainted with your ESG challenges and how to tackle them, here are some high-level steps to guide your efforts.
- Define Your ESG Goals:
Before diving into selecting specific ESG KPIs, it is essential to establish clear and measurable goals aligned with your organization’s or fund’s values, industry standards, and investor expectations.
- Select Appropriate ESG KPIs:
Select a set of ESG KPIs that align with your fund’s goals and industry best practices. It is important to strike a balance between quantitative and qualitative indicators to provide a comprehensive evaluation. Referencing industry-specific ESG frameworks, standards, and benchmarks can assist in identifying relevant KPIs. Each selected ESG KPI should be relevant, accurate, and reliable in measuring a portfolio company’s performance in a specific area. Relevance ensures that the KPI directly reflects the intended ESG impact. Accuracy requires defining precise measurement methodologies and data collection processes. Reliability necessitates consistent data collection and reporting practices to enable meaningful comparisons and trend analysis.
- Develop Data Collection and Reporting Mechanisms:
To effectively track and measure ESG performance, establish robust data collection and reporting mechanisms. Implement data management systems that enable the collection, analysis, and reporting of relevant ESG data. Consider portfolio monitoring tools (like Allvue’s Fund Performance and Portfolio Monitoring), data verification processes, and third-party audits to enhance data accuracy and reliability.
- Monitor, Evaluate, and Improve:
Regularly monitor and evaluate the fund’s and portfolio companies’ performance against the established ESG KPIs. Analyze trends, identify gaps, and seek opportunities for improvement. Engage with stakeholders and ensure your key portcos are communicating progress transparently through sustainability reports, annual reports, and dedicated ESG disclosures. Continuously refine your ESG KPIs and goals based on feedback, emerging industry trends, and evolving investor and industry expectations.
Track ESG KPIs with Fund Performance and Portfolio Monitoring
Allvue’s Fund Performance and Portfolio Monitoring solution provides private equity and venture capital managers with a reliable home base for tracking essential portfolio data as they make crucial investment decisions. The solution also allows managers to track dozens of ESG KPIs. If any of your preferred KPI metrics are already included in the platform, you can add your own custom metrics to the solution’s existing set.
Check out all the KPIs our solution can track by downloading our comprehensive list of ESG KPIs by industry below.
Still want to know more? Reach out for a demo today.
