ESG, the SEC and Private Equity Impacts
The SEC’s climate proposal affects private equity firms, whether they trade on U.S. stock exchanges or not.
ESG investment has become a major priority for private equity firms. According to the World Economic Forum, 72% of large private equity firms ($50 million to $1 billion) have incorporated ESG strategies into their portfolio of asset classes. Elizabeth Ming, audit partner, asset management and ESG, for KPMG and a coauthor of the report, ESG as an Asset: Private Equity Considerations from the SEC’s Climate Proposal, offered us details on why ESG has become so vital for private equity firms, how the SEC’s climate proposal would affect private equity firms and steps PE firms should be taking to ready themselves for finalization of the rules.
Private Company Director: Why has investment in ESG become such a top priority for private equity firms? In what way does the investment benefit them?
Elizabeth Ming: In short, the economic implications of ESG issues include value preservation, value creation and access to capital. Private equity firms recognize that ESG builds trust and can drive value across their portfolio in addition to mitigating risk. ESG can help differentiate portfolio companies in the market, which can contribute to a higher premium upon exit. Limited partners have increasingly high expectations of the private equity firms they invest with to both integrate ESG at all stages of the investment life cycle and provide the data to prove it. With these demands, ESG has become one of the ways investors assess the performance of private equity firms. In addition, proposed regulation in the asset management sector and more broadly has moved ESG up the list of priorities for private equity firms.
PCD: In what way does the SEC’s climate proposal, which on the surface applies to public companies, most affect private equity firms?
EM: Private equity firms that trade on U.S. stock exchanges are subject to all SEC reporting requirements, just like any other public company. However, we anticipate that there will be spillover for nonpublic firms as well. Private equity firms seeking to take a portfolio company public, for example, would need to include climate-related information on the IPO registration statement. Further, private companies will likely be required to provide incremental data to their public company customers, thus creating a strategic disadvantage if they are unable to produce such data.
At the highest level, the SEC’s climate proposal has the potential to raise expectations for the quality, volume and comparability of ESG data. This heightened demand from investors and the market could pressure private equity firms to disclose more ESG information than they have previously.
PCD: What steps should private equity firms be taking right now for finalization of the climate disclosure rule?
EM: While we wait for a final ruling from the SEC, there are several steps private equity firms can take to prepare for the new frontier of ESG reporting. At the management level, they can establish a cross-functional steering committee to review climate-related risks and monitor the regulatory environment. Management can also take stock of the commitments and communications they’ve previously made around ESG and take appropriate steps to substantiate these claims with evidenced-based action and effective processes. In anticipation of demand for high-quality, high-volume ESG data, firms can also strengthen their existing infrastructure or invest in new technologies that can collect, analyze and report on ESG data at scale, thus enhancing quality and their ability not only to respond to multiple stakeholders with varying degrees of data but to analyze the data for the purpose of strategic performance improvement. For those just beginning their ESG reporting journeys, a good starting point is to create an inventory of all greenhouse gas emissions and calculate a comprehensive carbon footprint for the business and its portfolio companies.