Dörte Höppner, of Riverside Company, shares a favourite anecdote and discusses getting to grips with ESG data.
To see how ESG data can effect change, consider what happened after The Riverside Company – a US-based private equity firm focusing on smaller, mid-market businesses – carried out routine ESG-based due diligence on a range of holdings.
“One of my favourite anecdotes relates to Riverside Europe’s tracking of the gender pay gap at portcos [portfolio companies],” says Dörte Höppner, the Luxembourg-based global chief sustainability officer at the firm.
“On certain occasions when we have onboarded new portcos to the ESG tracking system, the HR teams have come back to us saying they had no idea that they had a gender pay gap and they need to change it! Sometimes it is as easy as simply tracking the data to make firms aware there is an issue to address.”
Increased ESG engagement in private markets is very much driven by the influence of investors, particularly large pension funds with strict ESG guidelines, says Höppner.
“Investor reporting – particularly ensuring you are providing key information required – has always been front and centre for private equity firms. However, in recent years, the appearance of industry standards and regulations has increased awareness of ESG in the private markets sphere.”
Sometimes it is as easy as simply tracking the data to make firms aware there is an issue to address
The volume and sophistication of requests from clients in relation to ESG differs, she says.
“Some investors, particularly at the larger end of the market, have their own ESG teams that are highly sophisticated and will conduct ESG due diligence as part of the fund DD. Other investors with little or no ESG resource will rely on the diligence of those larger investors, rather than making their own ESG-related requests.”
“Concrete guidance”
This reliance on better-resourced organisations became almost a structural feature of private markets following the creation of the ESG Data Convergence Initiative (EDCI). Founded in 2021 by the Calpers pension fund and private equity firm Carlyle, EDCI now has around 450 GPs and LPs as members.
Founder members said that the lack of standardised, meaningful, and performance-based data from private companies was having a “paralytic” effect on private equity investors.
In the past, private equity firms were challenged when tracking ESG metrics effectively. This was due to varying LP data requests and different definitions of certain ESG metrics, says Höppner. How to measure and track carbon emissions differed across the industry, for example.
“Since EDCI metrics were introduced, firms can now use the definition from EDCI that is identical with the GHG Protocol,” she says, in relation to the standardised framework for measuring and managing the greenhouse gas emissions of public and private companies.
Before EDCI, there was no standardised ESG classification available to the industry, she says, adding that the EU’s Sustainable Finance Disclosure Regime (SFDR) regulation is not a one-size-fits-all solution.
SFDR enables funds to self-classify by their ESG strength, but – depending on the classification – GPs have different data points that they need to collect. Plus, a GP might choose an SFDR classification that does not ask for any ESG data at the portco level, says Höppner.
“Again, the advantage of EDCI is that it sets out exact definitions of the required ESG data points, so every GP and LP has concrete guidance on what they need to submit.”
Driving returns
Asked if she believes ESG monitoring creates alpha or is best seen as a risk-mitigator, Höppner says: “ESG is a value-creation tool and it makes business sense from a financial perspective. It can help drive Ebitda growth, attract and retain talent and customers, and can help build businesses with a sound and strong governance structure.
“It is of course also true that ESG is useful for risk mitigation. Certain areas, such as assessing supply chains regarding climate-related risks and the adherence of suppliers to human rights policies, require very careful management. This is especially true for businesses that have long physical supply chains outside their home country.”
She argues that ESG reporting is not a tick-box exercise. LPs need to be highly engaged and look beyond the data.
“Yes, the data is important, and over time it can show whether the ESG approach is working. But on its own it is not sufficient to drive change at the portco level.”
Höppner says she hopes ESG reporting will soon be considered as a standard practice and made seamless with financial reporting.
“Non-financial reporting is starting to reflect this but it does suggest that it is not as relevant as financial reporting.”
Höppner says she would like to see a single reporting set that includes factual data points like financials, alongside energy data and certain elements that can only be described, such as the governance structure of a business.
HR data should also be a part of this single reporting set, says Höppner. Likely, this would lengthen the list of her favourite gender pay-gap anecdotes.
*Read our special report on data for private markets here
