In the flood of sustainability reporting requirements, consistency is key – Tesi has updated its reporting framework
The role of sustainability reporting alongside traditional financial disclosures in companies has grown significantly in recent years. The need for more comprehensive reporting is clear – regulation around the theme is becoming more rigorous, and stakeholders important to companies, from owners to consumers, want sustainability to be communicated openly. Based on these premises, we started reforming our impact reporting survey after having interviewed several venture capital and private equity (VC & PE) industry players. As a result of this work, we have built a framework based on market standards, which you can view at the end of this blog text.
Regulation is one of the drivers of change in sustainability reporting, especially in Europe where the EU’s corporate sustainability reporting directive (CSRD) coming into force in the coming years. The increased expectations and requirements set by investors, owners, and the wider public are also contributing to the development of reporting. The VC & PE sector is not isolated from this change; investors in VC & PE funds (limited partners, LP) want to receive more comprehensive information about the impact of fund managers (general partners, GP) and portfolio companies’ sustainability progress. For investors, reporting is an excellent opportunity to understand sustainability factors and risks in their own portfolio and in the market in general.
The expansion of reporting is also a driver of change. For example, when a later-stage investor buys a majority stake in a growth company, in addition to its financial growth, the development of the company’s sustainability is often also on the table. Harvard Business Review, among others, has written about the responsibility of venture capital and private equity investing from an international perspective.
From market insight to sensible changes
At Tesi, we work for a more vital and impactful domestic VC & PE industry, and supporting sustainability development is a central part of Tesi’s work. We do this both by providing tools for the market to use and by being a responsible owner for our own portfolio. In addition, we require sustainability reporting from the companies in our portfolio.
To stay up to date with the rapidly changing reporting requirements and frameworks, we actively update our sustainability and impact survey. To ensure that our changes to this version are meaningful, long-lasting, and accommodate market needs as well as possible, we wanted to first gain a better understanding of sustainability reporting practices, experiences and potential problems with it.
To comprehend the ESG reporting landscape, we interviewed several LP investors and fund managers. The investors interviewed represented pension companies and funds of funds. On the GP side, we met managers whose investment strategies ranged from early-stage venture investments to later growth phase and buyout strategies. Discussions were held with both Finnish and international investors. In addition to the interviews, we coordinated the development work together with the Finnish Venture Capital Association.
Supporting sustainability development is a central part of Tesi’s work.
Fragmented market reporting practices result in additional work
According to the interviews, the lack of a common standard for reporting templates, combined with the increased demand from LP investors, increasingly burdened GPs. On average, funds currently report to their investors the answers to about 50 ESG-related questions from each of their portfolio companies. Later-stage investors generally monitored and reported more indicators than early-stage investors. Principal adverse impacts (PAI) according to the EU’s Sustainable Finance Disclosure Regulation (SFDR) are mainly reported by buyout phase funds, probably partly due to the more established business of the portfolio companies. Various reporting tools have been released in recent years to facilitate reporting, but their use was minimal according to the interviews we conducted, with many GPs and LPs favoring Excel. Currently, tabular data is easy for both senders and recipients to modify according to different reporting standards.
Some LP investors employed internationally used frameworks for sustainability reporting, while had custom surveys in use. Usually, the same reporting template is sent to all venture capital and private equity funds in the portfolio, regardless of their investment strategy. So far, data has been collected and processed mainly at the fund level due to resource constraints, but some investors had plans to model the impact of their portfolio at the target company level.
Tesi’s updated survey relies on international frameworks
The target company reporting template developed based on the interviews and Tesi’s own research has now been published. The questionnaire’s ESG questions are largely based on the voluntary reporting template of the European VC & PE association, Invest Europe, but it also includes impact indicators related to Tesi’s own operations. Other European state-owned VC & PE operators have also committed to using the same Invest Europe framework. Harmonizing reporting will reduce the burden on respondents, i.e., the target companies and the funds invested in them, and free up time for concrete development of sustainability and ESG matters.