Survey data from West Monroe argues that broad-based, cookie-cutter data collection risks is creating blind spots for acquirers. Instead of focusing on company-specific ways to drive down environmental impact and costs, that kind of one size fits all screen is only likely to turn up large liabilities. And it’s prevalent: two-thirds of respondents use a consistent ESG approach across their portfolios, compared to 21 percent with a specific policy for a section of the portfolio, and 12 percent focused on ESG metrics on a fund-by-fund basis.
The alternative is an industry-specific analysis. A company working in the water treatment industry might be better served reporting on its climate change mitigation than on how quickly its carbon footprint is shrinking. DEI key performance indicators rank among the topmost evaluated category, according to survey respondents. But healthcare providers might tout expanded service access to disadvantaged communities instead of tracking corporate diversity headcount alone.
The solution is only a partial one, though, and might create headaches of its own. UNPRI’s head of fixed income Carmen Nuzzo previously told me that middle market portfolio companies don’t have the technology, or indeed the data, needed to analyze substantial change year over year.
Making ESG diligence and investment criteria industry-specific is a laudable goal, but those same factors should also translate into a standard that translates across both private equity and credit. Tying ESG goals to financing is a critical component of credit funds’ strategies, and that means lender standards need to be aligned with those of equity investors.
It’s unclear if private equity buyers will make the leap to using industry-specific ESG evaluation criteria, but West Monroe argues that this kind of relevant diligence is the difference between a risk mitigation and a value creation posture.