ESG in Private Equity: The ESG Transparency Index 2021
The Private Equity landscape is undergoing a rapid ESG transformation.
Introduction
With increased pressure from stakeholders and increasing accusations of greenwashing, it is more important than ever that organisations navigate the sphere of ESG and follow the example of those already at the top. This year’s report demonstrates that the ESG landscape is quickly evolving; whereas ESG disclosure was once a rarity, it is fast becoming mainstream practise.
The ESG Transparency: A Private Equity and Venture Capital Index 2021 analyses Private Equity (PE) and Venture Capitalist (VC) firms on their ESG Reporting Performance. It is Orbis Advisory and ITPEnergised’s second annual report and includes 155 PE firms and 122 VC firms from the BVCA Directory.
For PE firms, the assessment included over 70 criteria centred around two themes: Responsible Investment and In-house ESG. In other words, its strategy and practice of incorporating ESG factors in investment decisions and across its portfolio, and the role ESG plays in its own business operations.
Private Equity Findings
The findings this year revealed that ESG for the Private Equity industry has improved across all measurable indices since last year. Diving a little deeper into the results, the number of firms scoring more than 50% has doubled, whilst the number of firms scoring zero has halved. The PE landscape is undergoing a rapid ESG transformation. The top performer this year, Arcus Infrastructure Partners, scored 7.1% higher than last year’s top performer. In fact, the average ESG score increased by more than 50% on last year. Within this, PE firms were generally better at disclosing ESG considerations related to Responsible Investment than In-house.
The highest scoring category was Pre-investment Due Diligence, with 43.5% of firms setting baseline ESG performances and conducting screening processes; a doubling since the 2020 index. General Performance, which covers alignment to ESG benchmarks and the publication of ESG polices and statements, scored the second highest at 40.4%. The component that represented the majority of marks available in the 2021 Index was Responsible Investing. The overall increase in ESG transparency since 2020 can therefore be attributed to the substantial increases in two sections of the Responsible Investing component: Exit Strategy and Pre-Investment Due Diligence.
Some investment industries were associated with higher ESG scores, such as renewables and electricity or infrastructure. This may be because the renewables industry has risen in relative tandem to the rise of ESG and infrastructure is already a strictly regulated industry.
A total of 26 different ESG-related benchmarks, standards, and guidelines were referenced. The most popular, the UN Principles for Responsible Investment (UN PRI), 50% of firms were signatories to. Already building resilience against future legislation, 15% of the PE firms are disclosing their climate-related risks and opportunities in line with the TCFD framework. While 8% of PE firms are aligning their operations to the Sustainable Development Goals and UN Global Compact, respectively.
New Agendas, New Priorities
The COP26 summit focused cross-industry attention on climate change and pressure from all stakeholders to incorporate ESG into business operations continues to grow. Attention should now focus on how PE firms can decarbonise their operations, particularly from their investment portfolios. This year, 13% of PE firms included in the index calculated the GHG emissions from their operations and 12% reported the GHG emissions of their portfolios. Hopefully, this will improve next year, with firms setting science-based targets to ensure they reduce their emissions in line with the Paris Agreement’s 1.5°C target. Additionally, it would be great to see a greater proportion of the PE industry actively supporting biodiversity initiatives and nature-based solutions.
Regarding the social aspect of ESG, it was reported that one-third of PE firms have publicly disclosed their diversity and inclusivity initiatives. Meanwhile, 12% of PE firms show that they are actively promoting mental health for their employees through benefit schemes, paternity leave, mindfulness, and exercise programmes. This leaves plenty of room for improvement.
“Top performers confirm ESG is central to the long-term success of businesses and that looking at corporate and investment strategies is of paramount importance.”
Rupert Clark-Lowes, Founder and Managing Director at Orbis Advisory
Conclusion
More PE firms are adopting and disclosing their responsible investing practises and In-house ESG performance in 2021 than the year before. ESG components across all of the index’s components have increased, showing overall improvement. It is now becoming routine practise for firms to disclose ESG information, with those who fail to do so becoming increasingly at risk of falling behind the curve. A number of PE firms are still at the beginning of their ESG journeys, with rapid progress expected in coming years, as climate change poses a material risk to the finance community. Regulation around climate change risk and greenhouse gas (GHG) disclosure is increasing, yet the PE sector is still in the infancy of identifying climate risks and impacts, with only 15% aligning with the TCFD framework. The PE sector is undergoing a rapid ESG transformation, but big gaps remain.
Read the full ESG Transparency: A Private Equity and Venture Capital Index 2021 here.
How we can help
Orbis Advisory work across a broad range of sectors to develop and support ESG strategies to meet investor demands, prepare for upcoming legislative changes, and create tangible benefits both now and in the future. Please see our website to explore our full range of services. For any inquiries, send an email to info@orbisadvisory.com, or fill out an online enquiry form.