ESG Data Convergence Initiative (EDCI) – What do you need to know

What are the goals of the EDCI?

In recent years the increasing focus on ESG factors in private equity reflects the growing urgency to reshape investment strategies with sustainability in mind. Recent research has shown that private equity funds or investments focused on ESG criteria can deliver competitive returns compared to traditional investments, highlighting the value of integrating ESG principles into private equity firm strategies. It is intended to benefit stakeholders and investors in private markets.

However, navigating the path to integrating ESG into investment decisions reveals a landscape fraught with challenges—especially within the private equity industry. Unlike public markets, one of the biggest hurdles for a private equity firm is the lack of consistency and comparability in ESG data across their investment portfolios. The inherent opacity of private markets exacerbates this issue, making it difficult for private equity investors to accurately assess ESG performance, price risks, and benchmark against other private equity firms. This inconsistency arises from various reporting standards, metrics, and methodologies, resulting in a fragmented ESG landscape that complicates analysis and decision-making.

To address these challenges, the ESG Data Convergence Initiative (EDCI) was launched as a collaborative effort among leading private equity firms, advisors, private equity investments, and ESG standard-setters. The initiative aims to streamline ESG reporting and assessment, fostering a more standardized and transparent approach to ESG integration and reporting.

Who are the current EDCI members?

Members of EDCI consist of 375+ General Partners, limited partners, and portfolio companies with the goal of creating greater transparency among private companies. The partnership is open to any eligible business entity seeking to ensure sustainable practices among its members. LPs and GPs will determine funds and strategies to include in the initiative. The partnership will closely follow all prevalent existing ESG frameworks to give private equity firms control and ensure efficiency of reporting. 

What metrics do you need to report on under the EDCI?

Below are the ESG metrics gathered during the 2023 reporting period, categorized into six core groups. The EDCI Steering Committee, composed of member GPs and LPs, conducts an annual review of these metrics for relevance and updates them for the subsequent reporting period.

The EDCI's new metric

Recently, the EDCI introduced a new metric, expanding the total from the present 15 to 18. The latest addition, the "Net Zero Commitment" metric, includes inquiries such as whether the portfolio company has established a decarbonisation strategy or plan for company operations, implemented short-term greenhouse gas emissions reduction targets (within 5-10 years), and set long-term net-zero objectives.

What is the role of GPs and LPs?

General Partners (GPs) and Limited Partners (LPs) are integral to the EDCI framework and mission, with GPs overseeing the collection and reporting of ESG data for portfolio companies, while adhering to EDCI metrics. LPs set ESG reporting standards, utilizing EDCI benchmarks to assess GP performance and align investment strategies with ESG goals. This collaborative endeavor between GPs and LPs ensures the availability of high-quality, comparable ESG data, crucial for EDCI's success.

What are the benefits of EDCI reporting?

For General Partners

The EDCI empowers GPs to enhance ESG competitiveness across their portfolios, attracting LP investors with more knowledge of ESG-focused funds and strategies. By reporting on key categories and metrics, GPs can specialize in impactful areas, distinguishing their portfolios and fostering clearer company accountability. Streamlined reporting reduces administrative burdens, allowing portfolio companies to invest more time in ESG improvements.

For Limited Partners

The EDCI offers transparency and accountability, providing streamlined access to data for evaluating portfolio-wide ESG performance. Improved data facilitates rapid assessment of ESG trends over time, enabling investors to make sustainable, multi-factor investment decisions. Rigorous reporting minimizes data gaps, allowing fund managers to commit to stronger ESG targets and goals.

For Portfolio Companies

Participating in ESG reporting incentivizes stronger ESG strategies, empowering companies to target areas for improvement. ESG-linked enhancements correlate with lower capital costs and higher valuations, rewarding companies demonstrating ESG leadership. Additionally, familiarity with ESG reporting requirements prepares companies for future engagement in public markets.

What is the EDCI's relationship to the SFDR?

The EDCI framework doesn't operate in isolation; it acts in tandem with other ESG reporting mandates, such as the Sustainable Finance Disclosure Regulation (SFDR) applicable to financial institutions in the European Union. While SFDR primarily focuses on disclosing sustainability-related information, EDCI steps in to provide the standardized metrics and processes necessary for meeting these disclosure requirements. For private equity firms subject to SFDR, incorporating EDCI into their practices can streamline compliance efforts by ensuring that the ESG data they collect and report aligns with SFDR's expectations for transparency and detail. This harmonious relationship between EDCI and SFDR significantly enhances the overall quality of ESG reporting, facilitating investors' ability to comprehend and compare the sustainability profiles of various financial products.

What do you need to know about the EDCI benchmark? 

BCG Expand, serves as the third-party aggregator of anonymised data reported by EDCI members. BCG Expand develops benchmarks using this anonymised data, which is made available only to EDCI members, allowing for comparisons against peers, such as industries and investment strategies. For instance, growth equity funds can gauge their performance with respect to Scope 1, 2, and 3 emissions, workplace diversity, and more against other private equity firms.