IFC - EMPEA Global Private Equity Conference 2019
Today is an important day for our industry, as we open the 21st Global Private Equity Conference (GPEC 2019), organized by the IFC in collaboration with the EMPEA. I’m very happy to be among the 900 delegates from 70 countries here to discuss top-of-mind themes for today’s finance and industry leaders. ESG is certainly one of them, and as such, we kicked off the conference with a meeting of our ESG Steering Committee.
The practicalities of ESG integrating remain daunting
We notice that even if private equity investors are increasingly dedicating time and effort to engagement with the ESG factors, there is a wide variation in ambitions and approaches to their integration across individual firms. The private equity operating model and time horizon allow fund managers a significant opportunity to create environmental and social value within their portfolios while maintaining and improving financial returns. But the practicalities of integrating ESG issues into all aspects of the private equity operating cycle – from initial screening of opportunities to due diligence and negotiating the deal, to oversight of the company while in the firm’s portfolio, to finally capturing value on exit – remain daunting for many fund managers. A Capital Dynamics survey shows that while an impressive 94% of respondents incorporate ESG factors at acquisition diligence, only half of those are still tracking ESG at exit.
On the other hand Development Finance Institutions (DFIs), who largely fund private equity funds in emerging zones, have seen rapid expansion over the past few years. A recent estimate is that annual commitments from DFIs as a whole grew from $10 to $70 billion between 2002-2014. Many DFIs have ambitions to play an even greater role going forward, continuing expansion and working more in emerging markets. However, DFIs remain a comparatively under-studied set of development institutions in terms of their due diligence practices and reporting requirements. Much of the information about DFIs is presented in forms that make aggregation and comparison difficult and time consuming.
Developing a nuanced understanding of frameworks and standards is imperative
Although ESG has existed since 2003, there is still lot of confusion around it. However, times are changing and ESG issues are undoubtedly going to become more prominent as major global risks. At present, there is a global consensus that managed properly, a focus on ESG in investment decisions not only manages these risks, but also creates value and an impact on the ground. The question remains when and how should they be assessed. ESG are often assessed through varied, non-financial reporting frameworks and standards available, e.g. IFC Performance Standards, SASB Materiality Map, the GRI Standards, UN Sustainable Development Goals, Impact Management Project, IFC Principles etc. Underlying this confusion is the fact that many big investment houses, such as DFIs, have their own internal ESG processes and different ways of interpreting information. Hence, why the new EMPEA ESG Committee on Transparency and Reporting has as its mission to develop a nuanced understanding of these frameworks and standards. This is imperative for industry practitioners and stakeholders in order to be more efficient and to drive results on the ground.
Harmonization to facilitate transparency and data sharing
DFIs could certainly benefit from better harmonizing their investments. In many instances, even when they are making the same investment, the investee must report different information to each DFI involved. To avoid this duplicative work, the new EMPEA ESG Transparency and Reporting Committee will try to bring more clarification and transparency to push the industry towards more harmonization. This harmonization of reporting standards will ease the administrative burden and allow GP’s to save precious time. In turn, this will help reduce clients' reporting costs and free up time for them to focus on what matters most: delivering results on the ground.
Additionally, it will also allow DFI’s to optimize their common investment and “facilitate transparent, standardized and interoperable data sharing”.
Oriane Schoonbroodt
Co-Founder & Executive Director Label R
Co-Chair of the EMPEA ESG Reporting & Transparency Committee
Views are mine.