// . //  Insights //  Turning ESG Data Into A Competitive Edge For Private Equity

While environmental, social, and governance (ESG) has become a strategic necessity for private market participants due to regulation and risk management concerns, European regulatory disclosure rules now require eligible financial market participants to report ESG data publicly, making basic ESG competency the norm for private equity firms in Europe.  

Based on the findings from a survey conducted with 20 European private equity firms, accounting for approximately 30% of the total private equity assets under management in Europe, Oliver Wyman and Novata analyzed the general partners’ approaches to managing ESG policies, as well as the associated challenges.

Top challenges facing private equity

Although European private equity firms exhibit a general enthusiasm for formulating ESG strategies to gain a competitive edge, they encounter significant barriers in doing so. Survey respondents consistently highlighted four primary hurdles: the difficulty in assessing the financial implications of ESG efforts; the resource-intensive nature of overseeing ESG metrics across varied portfolios; the challenge of fulfilling an array of data requests from limited partners in addition to regulatory mandates; and the overwhelming volume of ESG metrics to manage.

Establishing a correlation between ESG and financial performance

In Europe, there is a widely embraced consensus that robust ESG policies and infrastructure can contribute to a positive influence on the financial performance of both portfolio companies and private equity firms. The respondents in our survey identified numerous ways in which this is evident, including improved brand reputation, increased customer loyalty, and expanded revenue opportunities.

One potential strategy to establish a measurable link between ESG compliance and financial outcomes is to pinpoint the components of E, S, and G factors that can be tracked in financial terms and concentrate on measuring those.

Exhibit 1: In what ways do you see strong ESG performance impacting financial performance?

Navigating diverse portfolios to manage ESG challenges 

Private equity firms encounter complexities in tracking ESG performance across portfolio companies due to the absence of standardized frameworks and benchmarks, unlike the well-established systems in financial reporting. Although, frameworks like the ESG Data Convergence Initiative (EDCI) and the United Nations Principles for Responsible Investment Due Diligence Questionnaire seek to enhance standardization.

Standardized ESG metrics offer benefits such as inter-portfolio comparison, trend identification, benchmarking, and coherent reporting for limited partners, regulators, and internal teams.

Exhibit 2: How do you define and select quantified metrics and scores?
We are aware that we share reporting requests with our portfolio companies that are not aligned with other reporting templates they may need to complete, but that is the information we need to collect for our internal and external reporting needs
The PE firm participant

The time for action 

Amid increasing attention on climate and sustainability, private equity firms must prioritize ESG to meet demands from investors, banks, regulators, and the public. 

Firms need to elevate ESG’s importance to gain a competitive edge, transforming data into value and risk management tools. As standardization grows, a stronger link between robust ESG data and financial performance is expected.

This report is co-authored with Novata.