It is the real assets industry’s hope that the arrival of mandatory disclosures and voluntary reporting standards will bring greater scrutiny and transparency to ESG. From the EU’s Sustainable Finance Disclosure Regulation to the UK’s Task Force on Climate-Related Financial Disclosures and recent proposals by the US Securities and Exchange Commission, reporting frameworks are introducing standardisation to ESG investing to place sustainability at the core of business decisions.   

“Transparency and ESG disclosures are improving among real assets, largely because of this proliferation, but also under pressure from LPs who are themselves subject to new reporting standards and regulation,” says Silva Deželan, ESG director at UK-based manager Stafford Capital Partners. 

Marco Kistner, associate director, fund management at asset manager Luxcara, says: “Regulatory disclosure requirements and corresponding reporting standards are boosting transparency and comparability of GPs’ ESG measures, which is requested increasingly by LPs. Monitoring sustainability risks and impacts through KPIs is the basis to be able to form educated measures and a suitable ESG strategy.” 

Marius Dorfmeister, CEO at Swiss manager SUSI Partners, concedes that regulators, LPs and GPs alike all want improvements in transparency and are moving in a common direction, but argues that “standards are still too broad and not sufficiently sector specific; consequently, tangible improvements in transparency have been rather marginal so far”.

He stresses that it is also too simplistic to say transparency is more important in Western markets, partly because, even within Europe, the Benelux region and the Nordics are much further ahead in the process than other countries, but also because it strongly depends on the type of LP. 

“For our Southeast Asia-focused energy transition fund, we received commitments from development banks and development finance institutions, which have a very high standard when it comes to ESG reporting capabilities,” says Dorfmeister. “Generally, LPs that are regulated clearly have a higher need for transparency and concrete KPIs than others that are not.”

A light in the dark

But where exactly are LPs demanding better transparency? Paul Yett, director of ESG and sustainability at US manager Hamilton Lane, says the expectation from LPs globally is for full transparency, but the confusion is around what exactly they want to be transparent. “A number of entities are trying to coalesce around specific KPIs and reporting requirements that the industry can agree upon,” he explains. “From a GP perspective, that is a very welcome thing because if we know universally the five things that every LP wants then we can best dedicate our resources and time.”

Typically, when LPs think about transparency, they want to know crucial details like: managers’ ESG policies and how they will be implemented, including ESG governance and resources; how ESG considerations are being integrated into the due diligence process, ownership phase and at exit; how GPs engage with their portfolio companies on ESG matters; and what ESG reporting a GP can provide, including data on ESG performance and the impact of underlying investments.

In a 2021 survey of institutional investors by asset manager Schroders, respondents were asked for the information that would better help them understand or invest in a particular sustainable fund. The majority, 53 percent, opted for “clear and transparent details of the fund objectives including sectors or firms excluded or included”. Just over half also wanted to know more about how the fund contributes to specific sustainability goals, and for 48 percent the impact of a fund on the environment was important. 

Going above and beyond

As Schroders’ survey shows, for many LPs, beating an environmental or social benchmark is not the number one consideration when it comes to sustainable fund selection. Instead, the importance of engagement cannot be underestimated.

Last year, UK consultancy Orbis Advisory investigated 155 private equity firms to analyse and rank the most ESG-transparent managers. The report judged strong transparency on the basis of ESG engagement across the investment lifecycle and focused on portfolio companies: pre-investment due diligence, post-investment engagement and an exit plan. In-house, the methodology assessed the effectiveness with which investment firms integrate ESG across five key criteria: reporting, KPI setting, practicable initiatives, policies and external certification/benchmarking. 

European manager Arcus Infrastructure Partners finished top of the list for transparency, while the average ESG score improved by more than 50 percent on the previous year, demonstrating the improvements in disclosing appropriate data. The number of firms scoring zero also halved. 

In 2020, mid-market specialist 3i finished top of the Orbis Advisory transparency report and has taken steps to ensure greater transparency and stakeholder engagement. 3i publishes quarterly and yearly reports in line with the Invest Europe Investor Reporting Guidelines and engages with portfolio firms at the board level to share best practices and experience. 

Pre-investment, the manager uses a proprietary ESG risk assessment tool; post-investment, it conducts bi-annual ESG meetings for each acquisition and ensures mandatory labour standards. By 2025, 3i says it aims to achieve 100 percent transparency on labour conditions across its supply chain. 

Differences between managers and their investment strategies mean metrics and methodologies will likely vary when measuring ESG performance. But greater standardisation should help with comparisons between similar, sector-specific firms and give LPs better oversight of the industry. 

Selecting appropriate benchmarks, creating a platform or database to measure and monitor performance against KPIs, and identifying key ESG risks and opportunities most relevant to investors and stakeholders are all important elements of being transparent. 

Reviewing and comparing approaches and best practices from high-scoring peers can also be helpful. Equally, developing an implementation plan across the entire investment cycle shows real intent for full ESG integration. Producing high-quality data and being open about why certain KPIs were chosen can ease transparency concerns and help investors make better evidence-based decisions.