Asian Private-Equity Firms Face Growing Pressure to Improve ESG Reporting

Law firm Morrison Foerster’s Global PE Trends 2022 and Outlook for 2023 report has highlighted the need for mainstream private-equity funds to increase their focus on ESG issues. The report emphasizes the need for these funds to ramp up data gathering to demonstrate how ESG considerations are integrated into their investment processes.

A survey of 100 Asia-headquartered fund general partners with over US$1 billion in assets under management, conducted by the Asian Venture Capital Journal in the third quarter of 2022, showed that only 29% of funds always required the inclusion of clauses in investment documents to enhance or ensure ESG compliance, while only 38% required regular reporting and disclosures of key performance indicators (KPIs) relating to ESG. The lack of transparency, as most respondents did not require ESG KPI reporting, makes the risk of greenwashing a significant problem for many firms. The survey showed that only 59% of respondents considered climate change in their ESG due diligence, which is surprisingly low given the increasing pressure on companies to address ESG issues.

Limited partners are finding it increasingly important to collect ESG data for their stakeholders, understand their portfolio risks and engage with portfolio companies to drive change. Nearly three quarters of private-equity investors would consider stopping investments in a fund if the general partner failed to reach certain standards of ESG-related disclosures in the next three years, according to Coller Capital’s Global Private Equity Barometer report.

Potential Environmental Impact:

As investors demand sustainability data to understand the risks to their portfolios from climate change, private-equity firms must ensure that ESG reporting is properly implemented in their operations. Without consistent ESG data being collected, it will be difficult for these firms to gauge their portfolio’s performance on ESG topics and engage with portfolio companies to drive change. The lack of ESG reporting requirements for private-equity firms also creates the risk of greenwashing, where sustainability claims are not backed by clear definitions, leading to a false impression of the overall benefits.