Measuring and tracking ESG: where to start

This blog outlines how to take the first steps towards an effective ESG strategy for PE and VC firms using a software platform like KEY ESG. Our software enables transparent communication around ESG and aligns with standardised ESG benchmarks and reporting procedures such as the GHG Protocol. Our SFDR Blog Series offers insights and practical advice for compliance with SFDR and we also have a range of materials available for CSRD for EEA-based companies and investors. For more information on the key european ESG regulations, visit Your Need-to-Know Summary of ESG Regulations and Frameworks.

Table of Contents

• How do PE and VC see ESG in the modern business world?
• Where to start with ESG for PE and VC firms
• What challenges do private equity firms face?
• Which ESG metrics should PE and VC firms measure?
• Successful ESG portfolio reporting
• Final thoughts

How do PE and VC see ESG in the modern business world?

In recent dialogues, investment managers have stressed the critical relevance of strong ESG performance for Private Equity (PE) and Venture Capital (VC) firms in their decision-making processes.

This emphasis is not merely on adhering to current trends but is rooted in comprehensive risk management strategies, value creation opportunities, and meeting evolving investor expectations. Regulatory compliance is increasingly becoming a non-negotiable aspect of investment management, compelling firms to integrate the ESG frameworks and principles into their investment strategy and core operational frameworks.

Moreover, effective stakeholder engagement through transparent ESG practices fosters trust and strengthens relationships, which is essential for sustained success.

Furthermore, the shift towards impact investing reflects a growing recognition within the financial sector of the importance of generating positive social and environmental outcomes alongside financial returns.

This approach aligns with the broader industry's prioritising long-term value over short-term gains. Managers underline that those PE and VC firms that deeply integrate ESG considerations into their investment strategies are better positioned to capitalise on emerging opportunities, navigate potential risks, and achieve lasting impact and profitability.

Where to start with ESG for private equity and venture capital firms

Embarking on the ESG journey presents a unique set of challenges and opportunities for PE and VC firms, especially when it comes to portfolio companies.

A KEY ESG report reveals that 90% of portfolio companies struggle with their own ESG measurement tools, assessment and reporting, underscoring the need for effective ESG management processes.

PE and VC firms need to make measuring ESG performance reporting easier for their portfolio companies. They should give them the tools and knowledge to handle measuring their ESG performance matters well. These tools add value over time by finding risks and opportunities that regular other financial reports and measures don't see.

For an in-depth exploration of these challenges and strategies for overcoming them, refer to KEY ESG's report on the state of ESG in the PE industry.

Beginning your ESG journey

PE and VC firms must understand industry-specific ESG nuances. A renewable energy company, for example, might focus on its environmental impact as its principal value.

A technology startup may focus on governance including issues like data security, ethical business practice and ethical use of AI in its ESG efforts.

These examples demonstrate that each company's ESG initiatives and strategies must be customised, considering each company's distinct requirements and objectives within its industry. For guidance on where to start and to learn about which metrics are typically applicable for companies in your sector, contact our ESG experts for an introductory call.

A tailored approach helps PE and VC firms achieve impactful ESG integration, enhancing their investments' resilience, innovation, and value.

What challenges do private equity firms face?

KEY ESG's platform addresses critical challenges in ESG measurement, reporting and improvement for PE and VC firms, offering solutions through its comprehensive features. For more details, visit KEY ESG's Reporting Features.

Complex ESG data collection and analysis

The platform simplifies data gathering and analysis, enabling precise tracking and insightful reporting of internal data, which are crucial for informed decision-making.

Implementing tailored ESG initiatives

With actionable insights and industry-specific benchmarks, KEY ESG aids firms in evaluating performance, tailoring ESG initiatives to their unique sector challenges.

Aligning with international standards

The platform aligns with global ESG standards and industry benchmarks and ensures firms meet investor expectations and regulatory requirements.

Communicating ESG efforts effectively

KEY ESG's platforms help share ESG successes clearly and powerfully with others.

Using KEY ESG's reporting features helps firms tackle their ESG challenges. It improves how they manage and communicate their ESG performance both internally and externally.

Which ESG metrics should PE and VC firms measure?

To decide which metrics your PE or VC firm should measure, you should start with regulatory obligations which you and your portfolio companies have to adhere with. There are also voluntary frameworks such as the ESG Data Convergence Initiative (EDCI) which provide a good foundation of metrics to get started with. Thereafter, firms should focus on the key metrics most relevant to their operations, such as:

Environmental sustainability

• Carbon Footprint: Scope 1, 2 and 3 carbon emission measurement is often a good place to start for companies in high emitting sectors.

Social Responsibility

• Diversity and Inclusion: Tracking diversity metrics to ensure inclusive practices is applicable across industry. We see many technology companies focussing on social metrics.

Governance

• Compliance and ethics: Monitor adherence to ethical standards and good governance procedures. This is relevant across industry.

Actionable Steps:

• Identify core ESG areas: Choose metrics that align with your firm's values and regulatory environment.
• Set measurable goals: Define clear, achievable targets for each key metric, and action plans on how to get there and in what timeframe.
• Develop reporting mechanisms: Measure and report on these metrics regularly. Involve as many employees in the reporting process as possible to share the burden.
• Communicate your commitment: Share progress with stakeholders to demonstrate your ESG dedication.

By concentrating on these metrics and steps, firms can create a meaningful, compliance-oriented ESG narrative that drives impactful, sustainable investment strategies.

Final Thoughts

KEY ESG provides essential resources and software for firms to measure and track their ESG efforts effectively. 

Our materials help both beginners and those improving their plans. We cover topics like measuring your own and comparing ESG performance and impact, engaging with relevant stakeholders, and adhering to regulation. Our software is made for PE and VC firms as well as independent companies. It makes it easier to measure and keep track of ESG efforts. It provides a simple dashboard for better ESG management and reporting.

We invite you to book a demo to experience how our platform can enhance your company's ESG performance strategy. Our team is ready to provide personalised support and guidance for a successful and sustainable ESG journey.