Science-based targets: data hurdles and regulatory demands

Private equity's journey towards science-based targets: data hurdles and regulatory demands

Private equity funds aspire to adopt science-based targets (SBTs) as part of their commitment to Environmental, Social, and Governance (ESG) targets but significant challenges stand in the way - from data collection to the evolving regulatory landscape - making full lifecycle advice more important than ever.

Private equity (PE) firms invest in, acquire and manage companies across diverse sectors and are well-placed to steer these businesses towards more sustainable practices and accelerate the transition to a low-carbon economy.

Recognising their role in decarbonising the real economy, many funds have pledged their commitment to decarbonise their portfolios. Of the many frameworks and guidelines available to help them manage and monitor their progress, science-based targets (SBTs) offer a comprehensive and empirical approach. 

According to our survey of alternative investment funds earlier this year, around four in ten have so far adopted SBTs, driven by pressure from regulators and investors. Among PE firms, adoption is mixed, says David Postlethwaite, Associate Director, ESG Advisory at KPMG UK.

“It’s very much a story of two halves,” he says. “You've got some early adopters and some large cap fund managers going down the SBT route - particularly the Nordic managers and those who have funds marketed into the EU - who have a much more advanced level of implementation of SBTs.”

Many PE firms find themselves further down the maturity curve, however. “For our client base, actually setting science-based targets is still an aspiration. But that doesn't mean they're not aware of where they need to get to.”

SBTs are among the more sophisticated frameworks. According to a KPMG report, jointly produced with the BVCA (British Private Equity & Venture Capital Association) SBTs require a greater level of fund maturity than other available frameworks when it comes to adoption.

Navigating regulatory complexity and gathering the requisite data are particular challenges. PE firms will need to address these head on as the journey towards net zero in the PE industry gains momentum.

Adopting SBTs is “about future-proofing your fund to appeal to a wider investor base and being able to bring in institutional investment,” says Helena Pratt, Associate in Climate Risk and Strategy, KPMG UK. The question, she says, is “how do we get there?”

The role of assurance in data quality

“Data gathering is one of the hardest challenges… knowing the emissions of your portfolio companies, making sense of the data, and having suitable systems and processes in place to capture the data. Then comes the challenge of quality and making sure the data is correct and complete” explains Rachel Poole, Director, ESG Reporting and Assurance, Investment Management and Private Equity, KPMG UK.

Many funds are now seeking independent assurance of ESG data to ensure its quality and give GP’s confidence in their ESG reporting. 

“Boards are very mindful of the need to manage the relationship with the limited partners (LPs),” adds Rachel. “They're concerned that what they're reporting needs to be very accurate and very credible. Having a third party come in and verify that and provide an opinion gives them an additional level of comfort.”

Assurance can build a credible foundation for SBTs by delivering a solid baseline for GHG (Greenhouse Gas) emission reduction targets. Getting the data for your baseline year right is critical, Rachel advises. “If you start tracking from a particular baseline and you report reduction year-on-year and then discover that your baseline was incorrect you've got an awful lot of reworks and repositioning to do, so assurance over the baseline year is key for building confidence, with internal and external stakeholders.”

Scanning the sustainability horizon

Regulatory pressure is another significant driver of PE funds' interest in target setting and decarbonising their portfolios, and the landscape continues to evolve with new requirements, reporting standards and industry guidance emerging. 

New guidance from the Transition Plan Taskforce, regulations such as the Corporate Sustainability Reporting Directive (CSRD), and recent consultations for GFANZ (Glasgow Financial Alliance for Net Zero) and the Sustainable Finance Disclosure Regulation (SFDR) in the European Union mean that PE firms must keep a watchful eye to stay compliant and aligned with peers. "We encourage funds to do horizon scanning and an annual ESG health check because it's a fast-moving space,” says Helena.

And with regulations that vary depending on where the fund is domiciled, where its assets are located, and where its portfolio companies operate, it can feel like a “jigsaw”, adds David.

The complexity is driving many funds to seek external support: 58% of AIFs have sought this external guidance, according to our 2022 survey.

ESG throughout the investment cycle

Setting SBTs can enhance the value of portfolio companies and ensure a smoother exit process but private equity funds should embed ESG into their strategy far earlier, even pre-deal.

“ESG touches on all points of the deal cycle right from fundraising and due diligence but also at the house level and then through the ownership process, right through to exit,” says David. “It’s about having a consistent approach that aligns with the PE house’s own philosophy.”

For PE firms looking to future-proof their funds, adopting SBTs can align with institutional investors' expectations and manage climate-related risks.

While some PE firms may be progressing towards SBTs, others are building their foundations, focusing on developing an emissions baseline for their portfolio. Regardless of a fund’s sustainability maturity, the trend of full lifecycle ESG advisory is expected to grow, and funds will increasingly lean on experts who can guide them through to net zero.

Find out more about science-based targets for alternative funds by visiting our SBT hub.