Practical perspectives on reporting #15: Private equity and ESG: ‘Environment, Society, Gibberish’?

By Tamara O’Brien, TMIL’s roving reporter

Happy fiscal new year! But what new era do we find ourselves in? That’s the question on everyone’s mind, whether you’re a private equity investor or a pensioner. Since our January webinar, when it felt like Covid was the worst thing that could happen, the ground beneath our feet has shifted once again. And yet, and yet. In my world and probably yours, it seems as if, in practical terms, nothing has radically changed. Most of us can still get around, marvel at the spring sunshine, meet up, have a coffee, buy a paper.

Beneath the surface though, the tectonic plates are shifting. In the business community, through a combination of regulatory coercion, commercial expediency and genuinely held desire, publicly listed companies are finally digging deep into the ‘What are we here for?’ question. Serious corporates accept the need for a considered, strategic approach to environmental, social and governance (ESG) issues, and are on their journey.

But what of their siblings, the private equity (PE) firms: traditionally less regulated, less transparent and altogether more footloose and fancy-free? That was the topic at issue in today’s webinar. And in Cornelia, Paul and Bob, we had a panel who brought tremendous energy as well as insights to the discussion.

Claire averred that, in the UK, the newly listed clients she works with are often astonished at the extent and depth of ESG reporting expected of them (henceforth referred to as The Burden), while the UK press glories in the argument that The Burden is pushing whole swathes of companies into the arms of PE. Is this true? Will the International Sustainability Standards Board’s (ISSB) upcoming disclosure requirements make things worse? Or is the public/private playing field more level than we might think?

Even mavericks must play by the rules 

Representing the PE affinity, Cornelia sportingly agreed to play the role of panto villain. ‘Defend the role of private equity!’ proclaimed Claire, and the game began. Well, it turns out it’s not an easy ride on ESG issues on that side of the fence either. Cornelia explained that, while The Burden was definitely lighter, and their reports aren’t audited to the same degree, they face hurdles that don’t exist in the public sphere. For example, they’re not reporting to ‘the market’, but to two-, three-, maybe 400 Limited Partners (LPs). All from different geographies, each with their own way of asking the same questions. ‘What is your Diversity, Equity and Inclusion policy? Please answer in PDF/Word/Excel/our own unique platform’.

Plus, the baseline is constantly changing. Private equity is investing in a portfolio of assets. Companies come and go, they’re at different levels of maturity and reporting infrastructure... by definition they’re in flux.  So when Cornelia hears PE players talk about their science-based targets or net zero commitments, she bears in mind that they’re making commitments on a portfolio that’s ever changing.

Regulation is catching up on PE in any case. The EU’s Sustainable Finance Disclosure Regulation (SFDR), for example, or gender pay gap regulation in the UK, don’t just apply to listed companies. But for PE firms like General Atlantic, the biggest challenge is hitting the right balance between assessing the opportunity a company presents to maximise sustainable value, and its climate, reputational and other risks. They’re two completely different sets of questions.

A case of mind-forg’d manacles [1]?

Paul may be on ‘Team Listed’, but he doesn’t buy The Burden argument either. What drives companies to private equity is the carrot of finance, not the stick of regulation. ‘The simple fact is that for more than a decade, money has been basically free in a lot of markets,’ he said, ‘which has meant that companies can afford to stay private. The scale of PE assets is now enormous.’

For him, the key difference is one of psychology. The pressure of public scrutiny makes listed companies feel obliged to cover the entire range of ESG issues; whereas in private companies, the feeling is that disclosure can be more discriminating and tailored. Of course, materiality judgements are required of listed companies too; but the anxiety to please all stakeholders persists.

One thing’s for sure – investors are seeking more clarity from their investee companies. SFDR is one driver, and the Task Force on Climate-related Financial Disclosures (TCFD) is another. And Redington’s clients, many of them pension funds, are asking just as many questions of their private equity holdings as their publicly listed ones.

Let’s hear it for Gordon Gekko

It’s always fun when two people get into a light-hearted verbal tussle, and Bob and Claire certainly treated us to one of those today.

In her intro, Claire had admitted that most of what she knew of the PE sector came from the business press – where the message is often discouraging and the language positively biblical. The Financial Times referred recently to an ‘exodus’ of companies from the public markets, mostly thanks to our old friend The Burden.

Bob didn’t hold back. Why are you reading the British press, he remonstrated. It’s a complete red herring… they’re out of control… that whole thing around Unilever…  too excitable… too many vowels in your words…

Having got that off his chest, he spelt out his position. The Burden is a sideshow: the reason companies stay private is, as Paul said, because there’s a lot of capital out there, that helps grow businesses better, in many ways, for a longer time. Having interviewed over 100 PE people for research [one of them being Cornelia, as it happens], Bob found them informed, conscientious and voluntarily reporting on ESG. Bottom line? EVERYBODY wants ESG information. And PE, the Gordon Gekkos of this world, can be a force for good. They can get ahead of public equity in terms of sustainable investment.

Bob: Punchline is – Claire, I’m sorry, I love you, but you got this whole thing wrong! Stop reading the British press, it’s taking you on the wrong track!
Claire: The alternative being the American press?!
Bob: Hmm, well y’know, in fairness… at least the British press deals with substantive issues. Compared to Fox News, you guys win, I’ll give you that!

The panel really got stuck into considering questions from the floor and chair (even the fixtures and fittings were vocal in this event). How do you tell who are the good guys in PE? What are the red flags? How do we as investors get our agents to focus on what’s material? What about exit planning? Should PE stop investing in oil and gas? What can listed companies learn from private equity?

On the ‘good guys’ question, Cornelia gave us a fascinating insight. ’Let’s stop pretending we don’t know how to identify them. It’s about culture, not reporting. The first question to ask is: “how many people on your investment team can define the acronym ESG?” You’d be surprised how many investment professionals still say “Environment, Society…Gibberish”.’

Parting tips from the panel

On that amusing but sobering thought, let’s whizz straight to parting tips. What will really make a difference for business on ESG issues?

Cornelia: The ISSB! Standardisation isn’t the answer to everything, but we need to agree on what we report on.
Claire: Bob, anything else? Don’t say ditto.
Bob: Ditto.
Paul: I welcome the shift away from the mindset that regulation needs to be designed around the legal ownership of a company. It should be designed around its carbon and social footprint in the world, and that’s what the public interest entity (PIE) reporting model promises.

Which was a great place to finish, since the next TMIL webinar is on the evolving purpose of business – make sure you tune in on Thursday 7 July!

[1] In every cry of every Man,
In every Infant’s cry of fear,
In every voice, in every ban,
The mind-forg'd manacles I hear 
from London by William Blake