ESG reporting

Introduction

Regarding ESG reporting it is worth acknowledging that this can cover myriad factors and reporting standards on sustainability risks, factors and/or environmental, social and governance (“ESG”) measures are still evolving. A high-level overview of selected ESG and sustainability guidelines can be found below.

In order to help GPs and LPs set up a robust ESG reporting, Invest Europe has developed, in cooperation with the Invest Europe ESG Reporting Guidelines Working Group, voluntary ESG Reporting Guidelines, including a GP-LP ESG reporting template, that are explained in more detail below. In its development, the Invest Europe ESG Reporting Guidelines have taken into account the regulations relevant to the Invest Europe membership, best practices from existing international initiatives, and wider stakeholder expectations as highlighted by the membership. The Invest Europe ESG Reporting Guidelines and GP-LP ESG reporting template are publicly available on the Invest Europe website and aim to provide a voluntary tool and reference to PE/VC practitioners who seek to develop a robust and meaningful ESG reporting with and for their investors.

As the Invest Europe ESG Reporting Guidelines and GP-LP ESG reporting template are both optional, fund managers can claim compliance with the Invest Europe Investor Reporting Guidelines (under the provisions set out in the Introductory guidance) if they are not required to issue or do not issue ESG Reports and/or are using a different ESG reporting framework from the ones mentioned below.

Invest Europe ESG Reporting Guidelines and GP-LP ESG reporting template

Driven by the ongoing wave of regulatory, cultural and industry trends steering firms’ ESG disclosure on a European and global scale, the voluntary Invest Europe ESG Reporting Guidelines set out ESG reporting recommendations, reflecting not only current market practices and the realities facing practitioners, but also the expectations and needs of investors. One crucial part of the Guidelines is a customised and tailored GP-LP ESG reporting template, which brings together key ESG reporting frameworks relevant for European PE/VC investors today and aims to facilitate ESG data collection and reporting to LPs.

Funds, asset managers, and related entities are faced with increasing reporting obligations and transparency expectations. The ESG (r)evolution will require them to adapt so as to integrate ESG considerations into their business strategy and investment decisions and to develop more sustainable and ethical practices. Enabling funds and asset managers to perform well under this new normal, Invest Europe’s ESG Reporting Guidelines "Setting the Industry Standard for ESG Reporting" were first published for members in October 2022 and were then made publicly available in July 2023. This section of the Investor Reporting Guidelines borrows from that ESG-focused guidance.

For sustainability reporting and disclosure, the primary imperative is to identify potential material factors (including risks and opportunities) and discuss how they can or are being addressed. This can only be achieved once there is an understanding of how the fund, asset manager, and/or underlying asset (portfolio company) operates considering its strategy, governance, management systems, metrics and, where relevant, targets around these considerations. Although material factors for the reporting entity will naturally vary, the underlying tenets of materiality are that the ESG factors have an operational impact and/or a financial impact on the reporting entity. Essentially, high quality ESG reporting is important as it enables investors to better track performance and to have an improved understanding of their potential future value beyond current financial performance.

The Invest Europe ESG Reporting Guidelines should be considered alongside these Invest Europe Investor Reporting Guidelines and should be regarded as effective for reporting periods beginning on or after 1 January 2023. The Invest Europe GP-LP ESG reporting template, which is intended for investor reporting (as opposed to public reporting), is not mandatory. It is a voluntary tool and reference for PE/VC practitioners, including both GPs and LPs, to use at their convenience. The Invest Europe template also provides separate guidance for portfolio companies reporting into the GP, which is important for those investors who do consolidated reporting that covers their entire portfolio.

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Other initiatives for ESG or sustainability-related disclosures

There are currently multiple drivers for sustainability-related disclosures, including:

regulation affecting GPs and LPs such as the EU Sustainable Finance Disclosure Regulation¹ (SFDR) and the EU Taxonomy Regulation, the UK TCFD², or legislation affecting corporates such as the Corporate Sustainability Reporting Directive (CSRD)³;
international initiatives and organizations developing ESG reporting standards and frameworks⁴ such as the International Sustainability Standards Board (ISSB), the Greenhouse Gas (GHG) Protocol, the ILPA-led ESG Data Convergence Initiative (EDCI), and the UN Principles for Responsible Investment (UNPRI);
investor expectations such as side letter commitments to provide ESG data including the approved ESG policy/strategy; and
wider stakeholder expectations such as those that drive firms to publish an annual sustainability report.

It is important for funds to consider at an early stage the various drivers for making sustainability-related disclosures so that a consistent and coherent approach can be adopted. The starting point should be a materiality assessment, which will allow a firm to assess and identify what ESG factors are most relevant and material⁵ as well as any material stakeholders, e.g., investors, regulators, employees, etc. This should be done at the level of the reporting entity, separate from any fund-specific strategy.

Disclaimer

Although ESG has become an increasingly important part of the required reporting landscape, the specific ESG factors to report on will vary according to what has been agreed upon with investors and documented as such (i.e., within the fund documents). The Invest Europe ESG Reporting Guidelines are a voluntary tool to assist with navigating practicality of ESG and should be considered as such. They will remain voluntary. There are also other ESG reporting initiatives, outside of the Invest Europe Guidelines, that members are free to consider when determining their specific ESG requirements.

ESG reporting is still essentially separate from the financial investor reporting, particularly given the different timings for each as noted in the table in the "Structure of investor reporting" section.

1. Invest Europe Guide on SFDR and the Taxonomy Regulation, May 2023 / Invest Europe ESG Reporting Guidelines, July 2023
2. UK TCFD, Invest Europe ESG Reporting Guidelines, July 2023
3. EU portfolio companies , Invest Europe ESG Reporting Guidelines, July 2023
4. Definitions & Distinctions, Invest Europe ESG Reporting Guidelines, July 2023
5. Assessing Materiality, Invest Europe ESG Reporting Guidelines, July 2023