It has been another very busy year on the ESG front, with a drive to data standardisation at the forefront of many of our agendas. Whilst we have been diligently responding to various consultations on proposed draft legislation, it feels like we are not much further forward on achieving the nirvana of data standardisation with the regulations already in force, let alone the next wave of proposed standards currently being consulted on. We are still grappling with understanding the different data collection requirements of EU Taxonomy, SFDR, TCFD amongst others, whilst preparing for the forthcoming FCA’s SDR requirements.
Groups such as the International Climate Initiative (iCI) and the ESG Data Convergence Initiative (EDCI) are working hard to standardise certain metrics across the industry, but there is still a high level of divergence with different PE houses and portfolio businesses adopting different standards and collecting different datasets, making comparability difficult at best.
Further thinking is required on how we normalise data from one year to the next where there is significant M&A activity across the portfolio, or where businesses are acquired and sold midway through a data collection period, to ensure that the data output is still useful and ultimately comparable.
I have been challenged numerous times this year by various interested parties with ‘What’s the point of all this data gathering if there is no real benefit or value in doing so – doesn’t it just become data collection for data collection’s sake with potential for greenwashing and reputational damage?’. I think that we are all so busy collecting and analysing data with the current state of regulations that there is a risk that we forget the real purpose of why the regulations have been enacted in the first place. Although the management guru Peter Drucker famously said, “If you can't measure it, you can't manage it” not everything needs to be measured to the extreme. We do need to understand certain metrics to determine whether progress is being made and to ascertain next steps on key initiatives, there needs to be a greater emphasis on proportionality so that we do not spend more time collecting and analysing less relevant and useful data than on actual value-creation positive actions.
Personally, the question of materiality still needs to be properly addressed, especially where smaller portfolio companies and indeed smaller GPs, are being brought into many of these regulations by stealth. It would surely be more beneficial to collect and report on only the handful of data points that are genuinely material to a particular business, where KPIs can be agreed upon with management to monitor progress, and where there is a real tangible benefit in collecting and understanding any movement.
There is clearly still much work to do, and we need to consider this in a way that is mindful of potential greenwashing, but I am confident that we are slowly heading in the right direction.
The current ESG Awards nominations are now open for submission and it would be good to hear from those of you who are tackling these data collection issues in an innovative way.
Authored by Maria Carradice
Managing Director, Portfolio – Environmental, Social and Governance, Mayfair Equity Partners, and Judge, BVCA Excellence in ESG 2022
This article was originally published in 2022 as part of the BVCA's Excellence in ESG Awards, and some of the content may now be out of date. Please contact the BVCA if you have any queries or need further assistance.
