The $4 trillion club: how the world's biggest investors are driving clarity on ESG data
In an effort led by the largest US pension fund, California Public Employees' Retirement System (CalPERS) and global investment firm Carlyle, investors overseeing more than $4 trillion in assets are banding together to standardise data on environmental, social and governance (ESG) performance of portfolio companies.
The group so far includes Limited Partners (LPs) such as APG, CPP Investments, AlpInvest Partners, Employees' Retirement System of Rhode Island, PGGM, PSP Investments, the Pictet Group, Wellcome Trust.
On the General Partner (GP) side, Blackstone, Bridgepoint Group Plc, CVC, EQT AB, Permira, and TowerBrook Capital Partners LP have committed to the project, with more firms and institutions expected to join.
Richard Manley, head of sustainable investing, Canada Pension Plan Investment Board (CPP Investments) told AsianInvestor that the ESG Data Convergence Project is an important milestone for the investment industry, “but this is just the beginning not the end of the journey”, he said.
Keren Raz, senior responsible investment and governance specialist for private markets at APG sees the collaboration as a critical step towards addressing the challenges the investment industry faces when seeking quality data to assess ESG performance and financial impact.
“Our pension fund clients have been driving stronger ESG transparency and deeper ESG integration in private equity for a number of years. We're proud to have been an early contributor and a partner with Carlyle and CalPERS in this effort,” Raz told AsianInvestor.
COMBATTING ESG FRAGMENTATION
The main objective of the project is to streamline the private equity industry's historically fragmented approach to collecting and reporting ESG data in order to create a critical mass of material, performance-based, comparable ESG data from portfolio companies.
“Currently, it's difficult to assess ESG performance in investments over time. It’s difficult to get visibility into job creation, across our portfolio, it's difficult to get visibility into the emissions footprint of our portfolio. And that's what this initiative will help us solve,” Raz said.
GPs will track and report six metrics from their underlying portfolio companies, beginning with calendar year 2021. The initial six metrics are: Scopes 1 and 2 greenhouse gas emissions, renewable energy, board diversity, work-related injuries, net new hires, and employee engagement.
“The initial group of metrics will build capacity in investment teams and portfolio companies that helps reframe ESG integration as an opportunity to drive value and mitigate risk,” said Manley. “Once that capacity is built, we expect the framework to expand to focus on material ESG metrics that are pertinent to specific industries and businesses.”
The data will be shared directly with invested LPs by GPs and aggregated into an anonymised benchmark by Boston Consulting Group (BCG) for this first cycle.
Raz said the benchmark is one of the great features of the project as it will allow the group to compare their managers’ performances against an industry standard.
“We've encouraged all of our managers, including those in Asia to participate, and we'll be engaging with them on this as well. From a bigger picture perspective, as responsible long-term investors, we want to steer capital towards sustainable investments,” said Raz.
AN EVOLVING PROCESS
The ESG Data Convergence Project group plans to meet annually to assess the prior year's data, and to refine and build on these initial metrics, prioritising materiality. This collaboration is intended to be a long-term mechanism to increase the quality, availability, and comparability of ESG data in private markets.
While APG is excited by the momentum being generated, and the data collection by PE managers already underway, Raz said that the pension fund’s ambition goes well beyond the six metrics identified by the ESG Data Convergence Project.
She said APG will be looking for the group potentially to incorporate additional metrics in line with the Sustainable Finance Disclosure Regulation (SFDR), as introduced by the European Commission.
“We're also interested in other potential metrics that are industry specific. More generally, we are keen to look at the key issues that we are facing and how we measure ESG performance on those important issues such as climate change and biodiversity,” said Raz.
“The core concept is that we want to see ESG embedded as an objective for private equity, and we want to measure the outcomes of that. This collaboration is really just the beginning of us being able to do that.”
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