ESG Key Performance Indicators in Private Equity

PE firms are turning attention on ESG KPIs to meet stakeholder expectations, ensure the firm is aligned to industry best practices, and create value across the portfolio. Most of the ESG-related effort to date for investors has focused on red flag screening and due diligence. 

Portfolio company ownership presents an opportunity to establish KPIs, demonstrate that initiatives have been implemented at the portfolio company level, and position the firm for successful ESG reporting. 

Video: RPS ESG Dashboard for Tracking Key Performance Indicators

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Why Track ESG KPIs?

Limited Partner Pressure

Limited Partner pressure has been a key force driving uptake of ESG policy adoption and due diligence in the private equity industry. Limited Partners have placed increased scrutiny on ESG KPIs. In both U.S. and international financial markets, Limited Partners are being affected by regulatory reform generating new ESG disclosure mandates; thus, increased requests from Limited Partners around ESG performance to their General Partners should be anticipated. Limited Partners do not require (or want) comprehensive data overload; however, stakeholders are increasingly expecting to see demonstrated improvement in ESG topics important to a given business. 

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Peers (Industry Trends)

Evaluating how to set and report on ESG KPIs should be considered a best practice across the PE industry. While Limited Partner pressure may have been the initial force generating momentum around KPIs, this practice is growing across the middle market. As private equity firms develop frameworks for setting, tracking, and reporting KPIs, General Partners will need to understand existing market practices to stay in line with peers.

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Identify and Track Business Risks

There is a broader business case to both private equity firms and their portfolio companies for evaluating and selecting strategic ESG initiatives and connecting those initiatives to KPIs. In order to implement a successful ESG strategy, companies should identify core areas most relevant to their business and track performance. ESG initiatives are often implemented without integration into the core business strategy. While it is important for private equity firms to create a policy to meet the requirements of their investors and screen for red flags in due diligence, taking the next step to integrating ESG into the core business function of portfolio companies unlocks opportunity for value protection and creation and allows for easier, more meaningful conversations with investors.  

Set and Meet Goals or Targets 

Selecting and accurately measuring ESG KPIs embodies an additional step in the continuous evolution of ESG best practices, and baseline conditions can inform goal or target setting. Several resources can serve as good starting points when embarking on the effort to set goals or targets. For some ESG criteria, like turnover or health and safety incidents, established industry-level benchmarks already exist in the public domain.

Reporting frameworks also provide worthwhile guidance. For specific topics or initiatives, a robust and thorough target setting process (like science-based targets for greenhouse gas emissions) may be appropriate. Identifying and accurately measuring the right KPIs is critical to producing meaningful targets and reporting results.  

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Communicate Success to Stakeholders

There are several avenues private equity firms can use to communicate ESG success. Firms across the industry already publish public-facing annual ESG reports, and the use of these reports will likely continue to increase. At a minimum, General Partners should be prepared to present ESG-related information during annual Limited Partner meetings. Companies can also use KPI tracking results in annual meetings with employees, during recruiting to attract new talent, and in marketing materials to attract new customers. 

Guidelines for ESG KPIs

KPIs are intended to respond to the needs of a firm's stakeholders to track and demonstrate shared value. 

Some KPIs are universally trackable across industries, and provide important insight into how portfolio companies fare in comparison to their peers and the wider business market. Some of the universal ESG KPIs that are commonly tracked are provided below.

Universal KPIs

Environmental

  • Energy Consumption and Efficiency
  • Greenhouse Gas (GHG) Emissions

Social

  • Staff turnover
  • Training
  • Absenteeism

Governance

  • Litigation
  • Corruption

 

How do you choose the right ESG performance metrics?

Although some KPIs do apply to a variety of industries, high quality ESG KPIs generally should not be viewed as a collective set of metrics that can be applied to businesses universally. Useful KPIs are metrics directly related to risk and success of a specific business given its business model (e.g. product and service offering, regulatory environment, geographic footprint, industry and position in the value chain, extent of horizontal and vertical integration, etc.). 

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It is important not to select more KPIs than can reasonably be tracked and managed. To that end, ESG KPIs can often be developed to cover areas and collect data on topics where data may already exist, or if not may be easily attainable. Beyond mattering to a given business, good KPIs should be quantifiable, comparable over a given time period (e.g. quarterly, annually, etc.), and where possible, benchmarkable to peers in similar industries. ESG KPIs are not limited to quantitative data, but regardless of quantitative or qualitive data, must be quantifiable. For example, an annual employee survey can be used to capture employee satisfaction via a numerical scoring system that then can be tracked over time. 

RPS ESG Strategy Expertise

Defining, tracking, and reporting on KPIs may seem like a daunting task, particularly for private equity investors who are managing numerous portfolio companies across sectors that also have varying degrees of structural sophistication. While a one-size-fits-all approach typically cannot be applied to specific KPIs, the process to identify ESG topics relevant to the business and select appropriate KPIs is more formulaic. RPS helps clients scale this process across a portfolio and implement a system to track established KPIs. 

ESG data and technology platforms

Centralized, Online KPI Tracking

RPS partners with PE firms to develop a strategic direction for ESG planning and to manage KPIs at portfolio, company, and facility-specific granularity. RPS uses a proprietary reporting platform to track and manage ESG KPIs. For private equity firms, the platform provides a centralized online platform that can be used to inform ESG topic management and identify specific action items to show improvements toward strategic goals or industry benchmarks.

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