ESG Key Performance Indicators in private equity
Private equity (PE) firms are turning their attention to ESG key performance indicators (KPIs) to meet stakeholder expectations, ensure their firm is aligned to industry best practice, and create value across their portfolio. Beyond the usual methods of red flag screening and due diligence, portfolio company ownership presents an opportunity to establish KPIs and position firms for successful ESG reporting.
Video: Tracking ESG Key Performance Indicators in private equity
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. Across international financial markets, Limited Partners are being affected by regulatory reform generating new ESG disclosure mandates We should anticipate increased requests from Limited Partners to General Partners around ESG performance.
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.
Keep up with 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.
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 them 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’s important for private equity firms to create a policy to meet investor requirements and screen for red flags in due diligence, taking the next step to integrate ESG into the core business function of portfolio companies unlocks opportunity for value creation and facilitates easier, more meaningful conversations with investors.
Set and meet goals or targets
Selecting and accurately measuring ESG KPIs is best practice. Establishing baseline conditions can inform goal or target setting. 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.
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 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.).
It is important not to select more KPIs than can reasonably be tracked and managed. 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.)
- Benchmarkable to peers in similar industries.
ESG KPIs are not limited to quantitative data but must be quantifiable. For example, an annual employee survey can be used to capture employee satisfaction via a numerical scoring system that can then 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, the process to identify ESG topics relevant to the business and select appropriate KPIs is more formulaic. We help our clients scale this process across a portfolio and implement a system to track established KPIs to ultimately bolster the investment process, create short and long-term value across your portfolio, and strengthen your firm’s reputation.
Centralised online KPI tracking
As both strategic advisors and technical consultants, we translate sustainability factors into investment opportunity; enabling you to create value with confidence. We partnerwith private equity firms to develop a strategic direction for ESG planning and to manage KPIs at portfolio, company, and facility-specific granularity. Using a proprietary centralised reporting platform to track and manage ESG KPIs, we help clients to identify ESG topic management and specific action items to show improvements toward strategic goals or industry benchmarks.
Talk to us about ESG
We partner with private equity firms and corporations as strategic advisors to transform ESG factors into value creation; from the vision to delivery. Complete the form to set up an introductory call.
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