Private-equity firms will need to ensure that environmental, social and governance (ESG) reporting is properly implemented in their operations, as investors are increasingly demanding sustainability data to understand the risks to their portfolios from climate change, according to industry reports and forums. Mainstream private-equity funds have increased their focus on ESG issues amid growing investor expectations and reporting requirements, but will need to ramp up data gathering to demonstrate how such issues are integrated in their investment processes, according to law firm Morrison Foerster’s (MoFo’s) Global PE Trends 2022 and Outlook for 2023 report released last month. “We anticipate that asset managers will need to granularly substantiate the economic drivers for ESG investment philosophies, highlighting how ESG considerations are critical to enterprise value and the real risks posed to assets if companies fail to take into account ESG considerations,” MoFo said in the report. The law firm’s survey of 100 Asia-headquartered fund general partners with over US$1 billion in assets under management, including managers of private-equity firms, showed that less than half of respondents conducted ESG due diligence on every deal. The survey, conducted by the Asian Venture Capital Journal in the third quarter of last year, showed that only 29 per cent of funds said they always required the inclusion of clauses in investment documents to enhance or ensure ESG compliance, while only 38 per cent required regular reporting and disclosures of key performance indicators (KPIs) relating to ESG. “The lack of teeth in deal documentation and lack of transparency, as most respondents do not require ESG KPI reporting, makes the risk of greenwashing a significant problem for many firms,” the law firm said in its survey report. Towngas offshoot profits by turning waste oil into green fuels Greenwashing refers to sustainability claims that are not backed by clear, agreed definitions, which can lead to a false impression of the overall benefits. Meanwhile, only 59 per cent of respondents considered climate change in their ESG due diligence, a surprisingly low figure as companies are coming under more pressure to look beyond the carbon emissions that they are directly responsible for. All of the nearly 2,500 Hong Kong-listed companies are required to publish annual sustainability reports on their ESG performance alongside mandatory periodic financial reports. ESG reporting is, however, currently not mandatory for private-equity firms. Asset-management firms with at least HK$8 billion (US$1 billion) of clients’ assets in Hong Kong must report the greenhouse gas emissions data of their investment portfolios starting November 2022, according to rules announced in August 2021 by Hong Kong’s Securities and Futures Commission. Up to 200 of the city’s 2,000 licensed asset managers meet that criteria. “Limited partners are finding it increasingly important to collect ESG data for their stakeholders and understand their portfolio [risks]. So without consistent ESG data being collected, there’s absolutely no way to kind of gauge how their portfolio as a whole performs on ESG topics,” Ben Morley, partner and associate director at Boston Consulting Group, told the Asia Private Equity Forum 2023 last month. The event was organised by the Hong Kong Venture Capital and Private Equity Association. General partners are typically managers of funds, while limited partners are investors in the funds. “Without broad-based and actionable ESG data, it’s hard to know how [to] actually engage with portfolio companies to drive change,” Morley added. MTR unit launches start-up incubator with aim of reaching carbon neutrality by 2050 Meanwhile, 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, such as the European Union’s Sustainable Finance Disclosure Regulation and the proposed ESG disclosures by the US Securities and Exchange Commission, in the next three years, according to Coller Capital’s Global Private Equity Barometer report, which surveyed 112 private-equity investors around the world from 20 September to 4 November.