Making the most of ESG reporting

Growing demands for a stricter ESG reporting framework mean that investors and corporations will need to allocate considerably more time and resources to the task. It’s a turning point for the industry, to everyone’s advantage. Margaux Girard and Clément Morin explain how stricter ESG reporting is an opportunity, not a constraint, for the private equity industry.

Pressure on the entire financial and corporate sector to embed ESG in their professional practices is growing fast, be it from consumers, employees, investors, and now increasingly, regulators.

This new regulatory focus on effective ESG reporting is unquestionably positive as the world will certainly benefit from a better-coordinated framework to measure how companies’ actions impact the environment, their employees, and the broader community.

As our colleagues Sophie Flak and Mathieu Teisseire argue in their article on the Adaptation Economy, a streamlined and standardized set of ESG reporting requirements will deliver significant advantages by providing an investment benchmark.

However, perhaps understandably, some investors and corporate executives are anxious about what meeting these new regulations, including most immediately Europe’s new Corporate Sustainability Reporting Directive (CSRD), will entail.

The new EU directive, which effectively comes into force next year, will require almost all European companies over the next four years to start reporting on a broad range of non-financial qualitative and quantitative information, to be audited and published in the same way as financial results are today.

Those who are anxious admittedly have a point. It takes time, energy, and money to stay abreast of the reporting requirements as they evolve. The first challenge is to have a clear understanding of the new regulations. Next, each specific case needs to be addressed while simultaneously ensuring the quality and reliability of the relevant data . What’s more, in certain countries, the reporting must comply with both national and broader regional regulations.

However, beyond these constraints, we would argue that our experience at Eurazeo has shown how maintaining a sharp focus on ESG reporting opens opportunities and provides benefits for all the stakeholders in the private equity investment chain, not only the investors but also – and above all – the companies themselves.

This is why we make such a bold and positive claim, taking each of those stakeholders in the private equity investment chain in turn.

Investors get a harmonized and more compelling set of ESG data

Let’s start at the top of the private equity investment chain. As things stand, the industry’s Limited Partners and General Partners are today faced with many differing standards and sets of requirements.

The EU’s Sustainable Financial Disclosure Regulation (SFDR), which requires certain mandatory ESG disclosure obligations for financial sector companies, has already brought harmonization for investors. At the same time, the new CSRD will provide standardized ESG reporting requirements for the underlying portfolio companies.

However, there remains work to be done to ensure institutional investors are aligned in what they ask of the general partners who manage their private equity allocations. This will take place progressively as SFDR is better understood and there is less leeway for “creative” reporting of ESG lines.

Portfolio companies will also benefit from a stronger ESG profile

From the point of view of the companies backed by private equity investors, the advent of a harmonized ESG reporting structure will provide a solid and actionable set of data to help corporate leaders strengthen their companies’ sustainability. This applies above all in three crucial dimensions: climate strategy, recruitment, and relations with their shareholders.

First, reporting on carbon emissions will become mandatory and will be a key element in helping the EU achieve its ambition of drastically reducing greenhouse gas emissions by 2030.

Second, it will help portfolio company CEOs and their teams accurately assess how effective their actions have been and identify areas for improvement, thereby improving the attractiveness of the company as an employer.

Third, a strong and sustained set of ESG data will help those same PE-backed companies to position themselves to attract future financing as they continue to grow. This is because establishing a comprehensive set of extra-financial reporting over time, backed by solid and transparent benchmarks, will help make a company’s ESG performance more visible, and easily comparable, for the investment community.

Lastly, a clearer ESG framework will additionally help the private equity funds emerge stronger

Private equity funds and their general partners also stand to gain from the new clarity imposed by a cohesive ESG framework.

As is the case with Eurazeo, those of us in the industry who were early advocates of a sharper focus on ESG standards for our portfolio companies will have the satisfaction of seeing their pioneering work vindicated.

Those who are coming later to the game stand to benefit no less, as they come to understand that the new regulations are not merely rules for the sake of rules, but are an important and long-overdue contribution to a sustainable future.