ESG Disclosures for Private Equity

Private equity (PE) is not directly exposed to the proposed Securities and Exchange Commission (SEC) proposed rule – The Enhancement and Standardization of Climate-Related Disclosures for Investors – but it is not immune from the rising tide of expectations and demands for climate- and ESG-related disclosures from investors, customers, and other stakeholders. PE firms are currently adjusting to the new SEC marketing rule, set to take effect November 4, 2022, requiring that PE firms show fund returns net of expenses to prevent investment advisors from misleading clients. More enforcement is planned to ensure marketing claims are accurate, reliable, and transparent.

The Case for ESG Awareness and Maturity

Properly targeted and developed ESG initiatives support important organizational goals including:

  • Facilitating top-line growth
  • Reducing costs
  • Minimizing regulatory and legal interventions
  • Increasing employee productivity
  • Optimizing investment and capital expenditures

The education and analysis required for organizations to climb the ESG maturity curve, use their ESG journey to find and develop hidden value, and prepare accurate and transparent disclosures takes time. PE firms need to prepare for disclosures well before they are due. There is a well-defined path forward, and some new resources to simplify that ESG learning curve.

The general path organizations take to develop mature ESG governance includes the following steps:

Materiality Assessments – These assessments help organizations identify priority ESG issues and metrics to focus their ESG efforts in areas that add value. SEC Staff Accounting Bulletin No. 99 defines “material misstatements” as “When combined, the misstatements result in a 4% overstatement of net income and a $.02 (4%) overstatement of earnings per share.” There are rules of thumb for materiality, but they do not account for the complexity of the issue. The Supreme Court has held that a fact is material if there is “a substantial likelihood that the . . . fact would have been viewed by the reasonable investor as having significantly altered the “total mix” of information made available.”1

Some of these complexities around the total mix of information have to do with whether the misinformation is intentional, and whether small misstatements can add up to material misstatements.

1 TSC Industries v. Northway, Inc., 426 U.S. 438, 449 (1976). See also Basic, Inc. v. Levinson, 485 U.S. 224 (1988).

The Sustainability Accounting Standard Board (SASB) ( issued its Conceptual Framework in 2017. The framework (currently under review) defines a Universe of Sustainability Issues that serves as a menu of issues organizations should consider whether each is material to its business. SASB developed its Sustainability Industry Classification SystemTM for 77 different industrial classifications and provides a materiality map that identifies issues and metrics that are likely to (or have potential to) be material for each. SASB materiality maps are a good first step in defining material ESG issues, but there is more to the effort.

Benchmarking is defined as evaluating or checking something by comparison with a standard. It is a process of measuring performance of a company’s products, services, or processes against those of another business considered to be the best in the industry for the purpose of identifying opportunities for improvement. True benchmarking is a consuming assessment focused on a particular issue. While not true benchmarking, reviewing what competitors and industry best-in-class organizations are doing is a productive way to not only identify what issues may be material, but can help identify productive operational or strategic initiatives.

Stakeholder Analysis is a process of identifying people according to their levels of participation with, interest in, and influence on an organization; and determining how best to involve and communicate with each of these stakeholder groups. Conducting stakeholder analyses can help calibrate materiality assessments, including the identification of additional material issues, and provide insights into the organization’s full value chain and how to engage stakeholders. Stakeholder analysis can be an effective way to identify social issues that are both internal to the organization (e.g., labor practices, and employee health & safety, diversity, and engagement) and external (e.g., human rights, community relations, customer privacy, data security, product quality and safety, customer welfare, product labeling and marketing practices).

Greenhouse gas (GHG) emission inventories help organizations identify and quantify GHG emissions, including:

  • Scope 1 (direct emissions from a company’s facilities and vehicles),
  • Scope 2 (indirect emissions from purchased goods and services and electrical, steam, and heating and cooling for their own use), and
  • Scope 3 (indirect emissions in the organizations life-cycle value chain including 15 different categories such as GHG emission imbedded into purchased products and services, capital goods, transportation, waste generated in operations, business travel, employee commuting, transportation and distribution of products, use of products, end of life of sold products, and investments, franchises, and leased assets).

Most organizations start with a focus on Scope 1 and Scope 2 GHG emissions since they have more control over those emissions. Focus on Scope 3 often starts with emissions where they have more control, including employee commuting, business travel, and wastes generated in operations. The lifecycle analyses required to address Scope 3 GHG emissions usually progresses to developing a conceptual model for the company’s value chain and engaging suppliers and customers for information about their Scope 1 and Scope 2 emissions. Companies are finding that this engagement can lead to strengthened partnerships with suppliers and customers.

The Taskforce for Climate-related Financial Disclosures (TCFD) was established in 2015 by the G20 Finance Ministers and Central Bank Governors within the Financial Stability Board with the goal of developing a set of voluntary climate-related financial risk disclosures. The TCFD recommendations were issued in 2017 and included criteria for evaluating weather-related physical risks; transitional risks related to changes in policy and law, technology, markets, and an organization’s reputation; and opportunities related to resource efficiency, energy sources, products and services, markets, and resilience. The TCFD framework provides the basis for the proposed SEC climate-related disclosure rule. Organizations and countries representing more than 65% of the worlds GHG emissions have committed to become carbon neutral by 2050. And while that evolution to a low or no carbon economy is likely to accelerate, even if the world economy falls short of climate goals, the economy is likely to be transformed in ways that will result in winners and losers. The premise of the TCFD recommendations is that investors have a right to understand how traded securities are exposed to climate risks.

Climate change risk / opportunity assessments often include scenario analyses to help visualize risks and opportunities. While the path to carbon neutrality still has significant uncertainty, more organizations are embracing not only the operational efficiency improvements needed, but the strategic opportunities presented by climate change.

Resource Efficiency includes the more efficient use of resources, such as raw materials, energy, water, waste, and reducing the ecological impacts of an organization’s value chain. While much of the ESG conversation centers around GHG emissions, companies are leveraging opportunities to improve the efficiency of all the organization’s resources. Organizations are applying a variety of mapping, audits, and assessments to identify resource efficiency and opportunities for a more circular economy by engaging suppliers and rethinking its products, services, and operations.

Maturity Assessments include a review of an organization’s management systems as a measure of its capacity to identify and manage ESG risks and opportunities. While there are a variety of rating agencies and systems to rate an organization’s sustainability or ESG performance, many of these systems have received criticism lately as being out of touch with economic realities. Some of this disparity can be explained by the fact that sustainability has a generational timeline, and financial performance is often measured in fiscal quarters or even on a daily basis. Maturity assessments sidestep this predicament because they don’t necessarily measure how sustainable an organization is, but rather its capacity to identify and manage ESG risks and opportunities. There is an almost unlimited opportunity to make the world a more efficient and equitable place. While maturity assessments do evaluate ESG performance and results, they are less concerned with scoring the precise level of sustainability, and more focused on recognizing how companies can develop mature systems for identifying and managing risks and opportunities while the results speak for themselves through financial statements over time.

Getting started can be daunting for any organization. The process of assessment, comparison, and improvement is exploratory. It requires a sustained commitment including an ongoing and iterative process. A May 18, 2022, article in The Wall Street Journal by Jean Eaglesham and Paul Kiernan reported that the estimated first year and annual cost for a company to comply with the SEC’s proposed climate disclosure rule is $640,000 and $530,000, respectively. Cost estimates for smaller companies are $490,000 initially and $420,000 annually.  Properly designed, an organization’s path to ESG maturity can avoid unnecessary expense while harvesting the benefits of developing organizational ESG maturity and engaging important stakeholders.

EHS Support is constantly looking for ways to simplify this process to make it more efficient for its clients. The Principles for Responsible Investing (PRI) provides a set of six principles to incorporate ESG into investment analysis, decision-making, ownership policies and practices, and disclosures; and promote, enhance effective implementation, and report on progress in implementing the principles. PRI provides a variety of helpful sustainability education and investment tools to help the PE community integrate ESG and Sustainability into its acquisition, investment, and development strategy and planning.

While working with PE clients, EHS Support is working with PE firms as part of their investment in the ESG Data Convergence Initiative (EDCI). EDCI was launched by founding members including CalPERS and Carlyle to resolve confusion around a menu of ESG frameworks and rating systems to provide standardized, meaningful, and performance-based data. EDCI members include general partners, limited partners and investment managers, and investment consultants. The Initiative requires members to make specific commitments and has grown to more than 230 General and Limited Partner Members listed on their website ( The Initiative has developed a set of universally applicable and comparable metrics that include:

  • Greenhouse gas emissions
  • Renewable energy usage
  • Diversity (Board and C-suite)
  • Work-related injuries
  • Net new hires
  • Employee engagement

This initial list provides a robust focus for initial ESG efforts. EHS Support is working with PE clients on focused initial ESG efforts that include an EDCI Metrics Analysis Pilot, ESG materiality map, and ESG Scorecard and Maturity Assessment to identify management systems that could be applied to ESG. It is important for PE firms to conduct their own materiality analysis to identify other important stakeholders and issues from SASB and other ESG frameworks (e.g., Global Reporting Initiative (GRI)) to ensure ESG issues that are material to its important stakeholders are included, such as:

  • Product stewardship and life cycle management
  • Minimize overall energy demand
  • Minimize hazardous materials and wastes
  • Reduce air toxics or other air quality emissions
  • Minimize water use and wastewater discharges, particularly in water-stressed areas
  • Ecological and biodiversity considerations
  • Employee engagement, diversity, inclusion, and retention (beyond the C-Suite and BoD)
  • Community engagement
  • Business ethics and risk management

In addition to these issues, organizations may want to include other issues that align with their culture, operational efficiency, or other objectives. Organizations can always add material issues to their ESG efforts. Including priority issues early in the process can provide the time that is often needed to develop effective operational and competitive strategies.

As pressure builds to make public disclosures and commitments, PE firms can get prepared for the rising tide of expectations and demands for climate and ESG-related disclosures from investors, customers, and other key stakeholders.

For more information, contact Sr. Compliance Specialist Bob Pickert.



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