ESG reporting is evolving, driven primarily by investors in Europe. Haide Liu, head of investor relations for Ascendent Capital Partners, a private equity firm based in China, talked to Serena Tan, deputy chair of the Global Private Funds Group at Morrison & Foerster LLP about how LP demands are driving GP reporting on ESG. They appeared on the MoFo Perspectives podcast on February 7, 2023.
LP Views on ESG are Evolving
The MoFo Asia Funds ESG Survey 2022 found that most GPs said that they took ESG criteria into account when making investment decisions. However, there is a mismatch between ESG words and deeds in Asia. One of the biggest risks for funds making ESG claims is a mismatch between words and deeds, creating the risk of reputational damage, compliance failure, or value decline.
Limited partners in private funds have come to see ESG as important, and they are circulating more detailed questionnaires. Lui says that questionnaires have become more granular, looking for information and explanation rather than a simple yes or no on a particular topic.
LPs usually have two levels of requests. The first is how the GP is run; the second is about how the portfolio companies are.
ESG Claims Must Have Data
Tan noted that making ESG claims without data no longer works. GPs have realized that they need to use ESG principles in their work and be prepared to report on them, Lui says, with more firms hiring staff to do the reporting and oversight necessary for adherence to policies and procedures that put ESG to work.
European LPs have been the most focused on ESG, but US and Asian firms are following closely behind. One European LP that Ascendent Capital worked with had prepared a booklet highlighting its European managers and what ESG frameworks those GPs used with case studies involving their portfolio companies. The LP gave their GPs a detailed questionnaire, scored them, then told them how they compared to others in their region and how their region compared to the others.
Investee firms sometimes have trouble keeping up. While carbon footprint measurements and climate change are becoming more critical issues, the data can be difficult to collect from portfolio companies. This is likely to improve over time, especially because such environmentally friendly practices as energy efficiency and waste reduction flow to the bottom line.
Lui said that Ascendent Capital is working with a consultant to put together detailed KPI lists that it can use with portfolio companies to improve both compliance and reporting. It can also guide the due diligence of new investments.
Fund Managers Must Integrate ESG into Operations
Tan said that GPs must embed ESG into firm practices, and they must be prepared to report on that as part of showing a commitment to ESG principles. Having a written policy is easy; living it is harder. For example, LPs often ask not only if private capital firms have parental leave policies, but also how many employees take advantage of them. This is an evolution from simply asking if a company has a maternity leave policy, a wording change that recognizes how people live now.
