May 5, 2022
Why should Private Equity & Venture Capital industries care about sustainability reporting?
While sustainability might’ve once been seen as a growing fad – it is no longer merely that: sustainability is no longer optional. More and more companies are now committing to reducing their environmental impact, and investors and analysts have increasingly started to shift their focus toward sustainability issues of the companies in which they invest – and rightfully so, as the firms that aren’t taking sustainability seriously today will definitely be at a disadvantage tomorrow.
It is no longer a phenomenon that only Fortune 500 companies, large multinationals or corporations listed on stock exchanges have started measuring, let alone publishing their environmental impact and social responsibilities, everyone is getting in on it, and it’s about time.
Private Equity (PE) & Venture Capital (VC) industries have started to jump on the sustainability reporting bandwagon, and there are quite a few reasons why they should do so. Environmental, social, and governance (ESG) factors can have a large impact on a company's bottom line and being open and transparent about how these issues are managed can help PE & VC firms in terms of:
Legal compliance and reducing risk
Bringing value to existing portfolio companies
Attracting potential portfolio companies
Let’s not waste any more time and jump right into the above-mentioned factors and more.
Why is it crucial for private equity and venture capital firms to have a sustainability strategy?
Private equity and venture capital firms are somewhat unique, as their investments can span a broad range of industries and geographies. To properly assess the risk and performance of their investments, these firms need to have standardized sustainability reporting metrics that can be applied universally.
Recent taxonomy regulation proposals put forth by the European Union aim to do just that – create a reference frame for companies and investors. This would allow PE firms to benchmark the environmental and social performance of their portfolio companies against industry peers by protecting private investors from greenwashing, creating security for investors, encouraging companies to become more climate-friendly, mitigating market fragmentation etc. The result? More profit!
Now, when it comes to sustainability reporting, both PE and VC firms have different sustainability reporting practices compared to other industries. For example, PE and VC firms generally do not report on their greenhouse gas emissions even though they can have a large environmental impact. Additionally, they often do not consider social and governance factors when making investment decisions.
This could be because the PE and VC industries are still new, and there is no consensus on what constitutes good sustainability reporting. However, with the environmental regulations (SFDR and EU Taxonomy) put forth by the European Union, it is crucial for the investors to make a sound decision when it comes to investing.
Sustainability reporting is no longer a trend: it is the future (and a very near future, if we might add), which is why these firms must try to abide by the standard regulations ASAP.
What’s mandatory is for the companies defined in the scope of the legislation to make those disclosures. However, it isn’t mandatory for the companies to have activities aligned with the EU Taxonomy and there is no obligation on investors to invest in Taxonomy-aligned activities… at least not yet.
What are the benefits of investing in sustainability software for Private Equity and Venture Capital firms?
Some challenges faced by private equity and venture capital firms, together with their portfolio companies? Value creation and long-term growth through sustainable business models. Institutions that have already created a sustainability strategy and invested in sustainability software are reporting benefits in terms of financial performance, increased stakeholder engagement, strengthened reputation, and brand-building potential.
Here are some of the top benefits of having a sustainability strategy and investing in sustainability software:
Legal Compliance and Risk Mitigation
Sustainability reporting is the process of measuring and communicating an organization's economic, environmental and social performance. The benefits of sustainability reporting are manyfold, but for private equity industries, mitigating risk is one of the most important.
By understanding and mapping out their environmental and social footprints, PE firms can identify key risks and opportunities early on in a company's life cycle. Risks that would have otherwise gone undetected can now be managed proactively, leading to a more sustainable business in the long run.
One of the most effective risk mitigation tools for both venture capitalists and private equity is a systematic approach to managing sustainability risks. Here, sustainability software can offer a way for venture capital and private equity companies to reduce risks associated with social responsibility, compliance, business ethics, human rights, environment and governance. It can also help PE and VC firms ensure legal compliance – for the regulations that already exist, and for the many that will definitely follow.
Bring Value to Existing Portfolio Companies
A growing number of institutional investors are incorporating ESG factors into their investment decisions — and they expect companies they invest in to do so as well. In a global survey of over 600 institutional investors, almost 80% said that they would be more likely to invest in a company that can demonstrate commitment to ESG issues, and 55% said they believe companies with good ESG performance have better operations overall.
In recent years, many PE firms have been working with their portfolio companies to incorporate sustainability metrics into their business plans as part of their strategic planning processes. These metrics can include both financial and non-financial metrics (e.g., greenhouse gas emissions). They can also include qualitative information such as employee satisfaction surveys or customer satisfaction surveys. The goal is to improve overall business performance by creating sustainable value creation strategies that will lead to improved returns on investment over time.
So, if the goal is to bring value to your existing portfolio companies, then it is a good idea to go for a sustainability management software that can help track the status and the progress of a sustainability initiative through its SDGs, KPIs and ROI (return on investment), this can further bring value to existing portfolio companies by helping them understand how they can improve their performance on sustainability issues in order to benefit from competitive advantages offered by sustainable business practices.
As a PE or VC firm, having a sustainability management software already set up and running within your organization also means an ability to provide the same for your portfolio companies: this means providing them with a startup sustainability solution, providing them with tools to keep compliant with relevant legislation, and also providing them with the opportunity to become leaders of sustainability within their industries. Having one unified sustainability management software system also means being able to save on a lot of administrative work and therefore costs. Moreover, a sustainability software makes the PEs sustainability leaders who can further add value to their portfolio companies.
Attract Potential Portfolio Companies
By investing in sustainability management software and taking sustainability reporting seriously, PE and VC firms can signal their commitment to sustainability, and therefore attract new portfolio companies with like-minded values, who are looking for investment capital with a clear commitment to sustainability practices and principles.
Just like how sustainable investments are becoming increasingly attractive to both institutional and retail investors alike, as they provide better risk-adjusted returns over time, sustainable investors will therefore be more attractive to impact-driven portfolio companies with similar mindsets.
Some studies have shown that sustainable investments can outperform traditional ones in the long run by demonstrating their commitment to responsible business practices. In addition, sustainability reporting can help PE firms avoid reputational damage if they are accused of unethical or illegal activities.
This serves as yet another reason for private equity and venture capital firms to invest in sustainability management software since it will help them attract potential portfolio companies that share similar values and sustainability goals by giving them the ability to provide sustainability help to new portfolio companies.
According to research by PwC, 83% of customers are more likely to buy from companies that take a stand on social and environmental issues that matter most to them.
Now, based on these stats, investing in a sustainability software like SustainLab can help streamline the movement of environmental data from multiple companies into one central repository where reports can be created, viewed and managed. Moreover, the report follows all government mandates (EPA's Energy Star program, LEED certification etc ) with instructions on how to meet each standard, in addition to an overall score for each company.
Aside from the above-mentioned benefits, there are other reasons why PE and VC companies should consider sustainability reporting as a crucial task:
Employees care: A recent report by McKinsey stated that companies with higher levels of employee satisfaction are more profitable than their peers, demonstrating the connection between work environment, job satisfaction, and financial performance.
Regulators care: Many regulators are implementing new rules for corporations and investors to report on the environmental and social impact of their products and services. We have seen this recently with the EU’s Non-Financial Reporting Directive (NFRD), which requires all large corporations operating in the EU to disclose information relating to environmental matters, social responsibility, employee matters and diversity on the board of directors. Similar directives have been implemented in Australia and India.
What KPIs should PE and VC firms consider for their sustainability reporting?
Sustainability reporting is already complicated - even more when you have to consider all the companies in your portfolio. To responsibly and sustainably allocate their resources, private equity firms should track key performance indicators (KPIs) for their sustainability reporting. The most important KPIs vary depending on the firm but could include things such as how much energy is used, greenhouse gas emissions, or water consumption.
Measuring, and then subsequently reducing, these environmental impacts can create cost savings and long-term benefits for the firm. In addition to environmental concerns, social responsibility should also be a key concern for PE firms, this can include the percentage of employees who volunteer time to support local charities.
Now, when it comes to choosing the right sustainability reporting practice, the Global Reporting Initiative (GRI) offers guidance on sustainability reporting standards for businesses, investors and government agencies.
GRI’s Sustainability Reporting Guidelines: Private Equity Firms provide best practices for PE firms when developing their sustainability reports. These recommendations include:
Using a standardized reporting framework that allows for consistent comparisons across different sectors;
Using a consistent approach across all funds from the same firm;
Incorporating social and environmental indicators into financial reporting;
Using multiple years of data where possible; and
Providing different perspectives on the key issues faced by PE firms through narrative sections
The private equity and venture capital industries are evolving and maturing at a rapid pace. There is an increasing demand by limited partners for transparency into the environmental and social impacts of their private equity investments – so if you’re from private equity or a venture capital firm reading this, time to step it up!
Many companies have started to voluntarily disclose their sustainability performance, and we couldn’t be happier to see companies make such a responsible move. However, there’s always room for improvement and more efficient ways to improve the reporting process and enhance the management control mechanisms of companies. The whole idea of sustainability reporting should be rethought from scratch. In other words, sustainability reporting should be considered a tool in the overall management framework of a company rather than an end goal for corporations.
There is an old saying that you can't manage what you can't measure. While this holds true when it comes to environmental issues such as reducing CO2 emissions, there are many intangible benefits to companies interacting with both their stakeholders and their communities on a positive level, which leads to creating a better society.
Here, SustainLab offers you a sustainability management software that can help you stay ahead of the curve: it is agile, effective and can be customized depending on your requirements.
It can help reduce risks associated with social responsibility, compliance, business ethics, human rights, environment and governance.
It can help bring value to existing portfolio companies by tracking the status and the progress of a sustainability initiative through its SDGs, KPIs and ROI (return on investment)
It can also help streamline the movement of environmental data from multiple companies into the main repository where reports can be created, viewed and managed.
Additionally, it delivers the results quickly ensuring that your organization is on the path to profit and success!
Sustainability reporting does not simply concern public companies anymore. The lack of transparency and visibility on ESG issues can have a significant impact on your firm's reputation, which will ultimately affect its long-term performance and ability to raise money in the future.
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