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ESG and PE: Lots of Answers to Lots of Issues

There is no doubt that ESG continues to move up the agenda in private equity circles.

The past few years have created a huge amount of noise around ESG standards, PE firms, and their portfolio companies are having to navigate an increasingly complex path to demonstrate their credentials.

It is not plain sailing, according to JTC’s specialists.

Earlier this year, Jon Masters, Martin Punt and Marie Fitzpatrick attended the ‘ESG: Explore, Strategise and Grow’ conference, co-hosted by Real Deals and The Drawdown. The event which was held in London, explored some of the key ESG themes for 2023. It brought together over 100 private equity professionals including fund managers, institutional investors and expert advisors.

The overall sentiment at the conference, according to the JTC team, is that this is an area still very much in evolution – and as fast as solutions come to the fore, new issues and complexities emerge.

One of the major challenges for firms is following through on their ambitions in the ESG space, whilst at the same time being hugely aware of the potential to be called out for greenwashing.

“Generally firms are on board with their ESG commitments and are progressing well on their journeys,” says Jon Masters, Head of Business Development at INDOS Financial, a JTC Group company, pointing out that around one third of EU funds are looking to submit SFDR Article 8 disclosures this year.

“However, despite their best intentions, there’s still a good deal of caution around overpromising, or being called out by regulators for inadvertent gaps in their metric frameworks. The landscape is so complicated and there is so much data needed to evidence an ESG approach that it’s almost inevitable there will be gaps, and that’s potentially holding firms back. In fact, there has been a clear trend of funds going back to Article 6 because the reporting is just so complex.”

It is why taking a top-down approach to ESG, to ensure it is embedded in a firm, is so important – which was the focus of one particular session at the event moderated by JTC.

“It’s one of the dilemmas faced by PE firms,” adds Jon. “You can outsource certain things to support an ESG approach – data, consultancy, toolkits – but there is a balance to be struck and ultimately the internal culture and buy-in from the top is what is vital to a firm’s integrity.”

Another clear theme was the role of investors in the evolving ESG landscape.

“LPs are definitely a driving force in pushing the ESG agenda,” says Martin Punt, Director, Fund & Corporate Services. “But there are still questions about expected returns and value – and the challenge for GPs then becomes how to measure and evidence that without countering the underlying ESG principle.

“Data collection to evidence ESG gains is incredibly complicated whilst at the same time LP demands on ESG Due Diligence Questionnaires (DDQs) are increasing dramatically. For managers, it can feel like drowning in a sea of data.”

Underlying all this is the issue of skills and knowledge. The depth and breadth of panel debates and keynote speakers at the conference reflected the growing need for diversity of expertise all the way through the sector.

“Diversity, equity and inclusion (DEI) is a big focus for PE firms in an ESG context,” says Marie Fitzpatrick, Senior Director – Fund Services.

“On the one hand, there needs to be a strong DEI story to tell to back up what a PE firm stands for – and at a more practical level, having that diversity of knowledge is actually critical in being able to understand and integrate ESG into an organisation. Firms are still grappling with this.”

“What’s obvious is that one size doesn’t fit all. All firms are at different stages of their ESG journey. The important thing is to focus on their own objectives, use data and metrics that work for them, and back all that up with the right skills.”

Next week, JTC will be hosting workshops in Jersey (28 February) and Guernsey (1 March), with special guest Tim Hames, former Director General of the British Private Equity and Venture Capital Association (BVCA). If you are interested in attending, please contact Jon, Martin or Marie to find out more.

You can find out more about JTC’s private equity and ESG capabilities through the dedicated web pages.

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