CSRD & ESRS for North American Companies: Navigating the Path to Sustainable Reporting

Introduction and speakers

Today we will take you through an overview of the ESG Data Convergence Initiative, also known as EDCI. This session today is sponsored and put on by Pulsora. Pulsora is the all-in-one platform for enterprise sustainability management. Pulsora helps companies collect, report, and improve on their ESG sustainability performance. Pulsora is a proud partner of EDCI, and BCG, and the Expand team. We help our private equity clients to report under this framework. We'll go through a little bit of that today.

With regards to who you will be hearing from today: my name is Nicole Peerless. I run Global Business Engagement at Pulsora. We also have Ben Morley on the call, who is a partner and associate director at BCG, working within the principal investors and private equity team focused on climate and sustainability and social impact practices. Ben is an integral part of the EDCI work. We also have Ben Baxter with us, who is a principal at Expand. Expand is a Boston Consulting Group company providing independent, impartial, and anonymous benchmarking to firms' business, operations, and technology performance relative to their peers. We also have Maddie Foote on the line from Pulsora. Maddie is our lead in sustainability regulation. She has a history as a lawyer. She's joined in-house and helped shape the platform for regulation.

EDCI origin story

Going back to around 2021: back then, there was a huge universe of ESG data that could be collected by private equity funds. Asset owners were increasingly thinking, "We need to get greater visibility on the investments we're making into GPs, into private equity funds." If you were sitting in a private equity fund at that time, you were often inundated with different requests from asset owners, kind of different formats, different templates, PowerPoint presentations, Excel documents, as each of those asset owners looked to solve for the need to gather greater data on their underlying portfolios. Because of the volume and proliferation of those data requests, each individual GP was overwhelmed with the different requests being made of them, and there was very little progress being made in actually being able to collect, gather, and share that data.

A small group of GPs and a small group of LPs, initially led by Carlyle on the GP side and led by CalPERS on the LP side, came together and said, "What if we could align as a community around a core set of metrics that any portfolio company anywhere in the world should be able to tell you?" There were a number of meetings throughout the course of 2021 over Zoom that went back and forth on what that list should be. They came around a core set of six metrics: carbon footprint, renewable energy usage, job creation, employee engagement, diversity, and work-related accidents. Metrics that could be applicable to any business anywhere in the world.

Obviously, there's a long list of others that could be included, but here's a core starting point. "Progress over perfection" is the mantra of the initiative. A core starting point that all GPs and all LPs could participate in. BCG was helping to facilitate some of those conversations. Then the founding members of GPs and LPs, and now the steering committee of the EDCI, made that open source. "Here's a list of those metrics. Here are existing standards out there: OSHA guidance, Greenhouse Gas Protocol. Let's point in the direction of where that guidance is, make it open source, and open that up to anyone in the industry."

EDCI mechanics: six core metrics and growth

The traction since then has been remarkable. We're now at 350 GPs and LPs, a truly global community that have agreed to collect and report on this data. The steering committee has now reviewed the second year of the initiative, and we've had 4,300 portfolio companies contribute data to the initiative through the EDCI.

Two main things happen when someone joins the EDCI. First, you're committing, as a GP, to share that data with LPs that are requesting it from you. You're also agreeing to share that centrally into the initiative to create an aggregated data set that allows for robust benchmarking, and to help allow a greater understanding of what truly matters when it comes to ESG in the private markets.

BCG is serving the initiative in its capacity as the advisory and benchmarking partner. All GPs are securely and anonymously sharing data on their portfolio into BCG Expand. My colleague Ben Baxter will share more on that. We create these benchmarks and share that back complementarily with all GPs and LPs that are part of the initiative.

Benchmarking value

That allows every GP to have real insight, for the first time really, about how their portfolio compares to their peers on some of these dimensions. Up until now, we've used proxies from the public markets, which have been imperfect proxies. They're the best available data, but there are quite significant differences between a private markets business and a public markets business. Actually being able to say, "I'm investing in the chemicals space in North America, and I just want to look at how other chemicals businesses in North America are doing on some of these dimensions," and being able to get a customized benchmark that's anonymous, allows for more like-for-like comparisons.

Recent additions and the steering committee

The initiative has grown. We're now at 350 GPs and LPs. For the second year of the initiative, the steering committee added one new additional metric, which is gender diversity in the C-suite. Originally there was gender diversity in the board, and now that also applies into the C-suite.

For next year, there's going to be a new metric around net zero. Three very simple questions around: do you have a decarbonization plan in place? Do you have a short-term target? Do you have a long-term ambition around that target? The idea is the initiative will incrementally expand over time, but it's very incremental. The core set of metrics will always remain. This is something that will evolve with the industry, but it's industry-led and will remain industry-led.

Every GP and LP that's part of the EDCI can input into which metrics they would like to be considered for inclusion for next year. There's a structured process where the steering committee reviews that and facilitates a vote on it. We are closely engaging with Pulsora. A number of clients use Pulsora to collect EDCI data from their portfolios this year and then share that into the initiative. We're working on putting in place the functionality to allow for the benchmark to be visualized back within Pulsora. It's very much an industry-wide initiative that's looking to make it as useful and as pragmatic as possible for the GP and LP clients.

Opportunities and challenges

The opportunity is to continue to grow the initiative. We've had great additional adoption in Asia this year, but there are still a lot of Asian GPs that have not yet joined the initiative. This is designed to be something that operates on a global basis. I'm excited for the opportunity to add a net zero metric to the initiative next year, and to help asset owners that have made net zero commitments to truly understand how their portfolio is doing on some of those dimensions. I'm also excited for continued collaboration with Pulsora and others, allowing the benchmark insights that are coming out from something like this to be as useful and as helpful for EDCI GPs and LPs as possible.

Some of the challenges that come with that are around: as you're operating at this new scale, helping to make sure that every EDCI GP and LP is able to benefit from the initiative and engage with our team and answer their questions. That's just about being able to resource effectively to support 350 GPs and LPs.

It's a question we often get from the GPs we work with: how are they tracking against their peers? Having the EDCI really levels the playing field and creates one safe space for them all to be collecting on a certain set of metrics. That's truly industry standard, both for how they work with their portcos and their LPs.

Expand's role in benchmarking

Expand is a subsidiary of BCG, which focuses on benchmarking, primarily quantitative benchmarking, for a wide range of firms across a wide range of industries, particularly financial institutions, private equity, and technology companies. When the EDCI was born, essentially, and BCG were involved looking at how to power the actual data collection, Expand was an obvious company to turn to to provide that.

Our expertise means that we are specialists in data collection, data aggregation, data validation, and data analysis. We have the tools and wherewithal to provide the benchmarking back to the members in various ways, particularly for the EDCI on our online portal. That's essentially what we've done for the first two years of the initiative and plan to continue into the future.

The benchmarking process really kicks off at the end of this year, or in the next month or two, with the release of the template for next year's data collection. Firms will go away and spend a decent amount of time capturing this data and validating it themselves before submitting to us, with the submission deadline being in the spring next year. From that point on, when people submit, that's where our hard work really begins: a lot of time spent on validating the data, processing it, cleaning it. That's what we've been doing over the summer on this iteration, and what we'll be doing next summer on the next iteration, making sure that what comes out the other side is a really high-quality dataset, useful for benchmarking for GPs, LPs, and individual portcos in some cases.

Data validation, cleaning, and aggregation

There are various stages to that process. One of the key ones is working out the approach to benchmarking and what the messages are telling us, what the data's telling us, for how to provide the most relevant analysis to the GPs, LPs, and portcos on how they're performing, and how private equity is performing overall versus the public benchmark. We also include a public benchmark, which to date has been based on Refinitiv's ESG database, so that we can show how the private equity industry compares on all these KPIs to the publicly available data.

All of that comes together into the final results, where we can provide all those analyses through our portal. Looking into the future, we're providing as much of that as possible back to people on whichever channel is most useful to them. In many cases, that may well be providing the data via Pulsora, enabling platforms like Pulsora to be a one-stop shop for ESG data, including not only GP data but the EDCI benchmarks as well, at all levels, GP level, portco level, and so on, for people to get all the value they can out of it.

Insights and bespoke benchmarks

The benchmarks that we give back to people are not just at a high level. The fact that we have 4,300 portcos submitted this year means that we can provide a tailored benchmark for every portco, telling them: based on the fact that your portco is in this sector, in this region, this growth stage, for example, the benchmark for your emissions could or should be this. Or the benchmark for your renewable energy consumption should be this based on that profile.

The richness of the data in the EDCI really enables us to drill down into it and provide bespoke analysis for every GP and every portco on what they should be comparing themselves to.

Demo: EDCI catalog in Pulsora

We are really proud at Pulsora to be a participating tech platform with the initiative. We're currently working with a number of our customers to help them report against EDCI. Recently, for example, we worked with one of our customers who happens to be one of the oldest private equity firms in the world to collect data from about 40 of their portcos and submit it to EDCI for the first time.

Landing on the front page, we'll navigate to this catalog that we've populated with EDCI metrics. Here we have all of the 2023 EDCI metrics. We update this library of EDCI metrics each year to account for any updates, whether that be to add new metrics or to make any changes to existing metrics.

In this view, we can see exclusively EDCI KPIs right now, but if you were to report to other reporting frameworks or have other disclosure requirements, those can all be added here as well. For example, any SFDR indicators, any metrics under the EU Taxonomy. Perhaps you'll want to add questions from LP questionnaires, or you have firm-specific ESG KPIs. All of that can be kept in this catalog and stored within Pulsora.

Demo: collecting data from portcos

Right now we're looking at a firm-level view, but we can also see all of this information at a portfolio company level. The way that this information is collected is that the PE firm will send a request to the portco. That will be received by the portco, they'll fill the information out, they'll publish it back to the PE firm, and then that all gets stored in Pulsora.

We can also view it by filtering for different periods. For EDCI, it makes sense it would be filtering on an annual basis because that's the length of the reporting cycle. But perhaps for other reporting requirements, you might want to see it on a quarterly or monthly basis, for example. That's all supported through Pulsora.

Demo: reporting to EDCI

Once you've collected all of this information from your portcos through Pulsora, the next step is to submit it to the initiative. That is done ahead of the reporting deadline, which is April 30 of each year in general. You can take all of the information that we have in Pulsora and output it in a number of ways.

You can output it by generating a report which matches exactly the EDCI data submission template. Here you'll have a bird's-eye view of all of the information you've collected from your portfolio companies, set out as required by EDCI. We update this template based on any updates that come through from the initiative itself. This template can be easily shared amongst LPs as well who are inquiring about this information, or it can be used internally.

The second method for outputting information from Pulsora to the initiative is through a straight push of all of these values from Pulsora to the initiative through an API that we maintain with the organization.

Q&A: Data anonymity and security

The benchmarking is aggregated and anonymized by Expand. Is there any reason for GPs to be concerned about potential commercially sensitive information being brought into the benchmarking, and how is that handled?

The simple answer is, not that we see, no. At the very first level, GPs are asked to submit their data with GP names anonymized. There is an optional field for them to provide the GP name if they want, because it helps to tie it back when they see their data later on. But the large majority of GPs provide their data without the real name of the portco provided. That's the first basic stage of anonymization. Even we receiving the data cannot tie it back to a portco.

From there, the first thing that we do when it gets into our system is ascribe a completely anonymous unique ID to that GP. At a very early stage, the possibly slightly more identifiable KPIs like FTEs and revenues are instantly aggregated into buckets. Any of the filtering that's done on the platform, or that's potentially done when the data's fed back to other platforms, is only done at that bucketing level. There's really no information in the data that is attributable to or identifiable as a specific portco. GPs' names are instantly stripped off the data as soon as it goes into the benchmarking data that's fed back.

That's not to mention the very high standards of data security we and BCG have. We obviously work with some of the largest and most data-sensitive organizations in the world, and have to meet very high security standards for that as well. When you take those two together, there's very little cause for concern.

The new 2024 net zero metric

In the upcoming 2024 cycle, there is a net zero metric that will be added. That metric includes a few questions, for example, whether a portco has a decarbonization strategy or plan in place, whether it has any short-term GHG emissions reductions targets, or whether it has a long-term net zero goal.

This has been an exciting year-long journey for the EDCI over the last 12 months. There's a lot of really interesting data that comes out of the carbon footprinting and the greenhouse gas emissions Scope 1 through 3. But this is the first time we've actually got a forward-looking metric that complements that and says: as a portfolio company, how are you thinking about it? Do you have a decarbonization plan in place? Do you have a strategy? Does that have board oversight? Do you have a target associated with that plan? Are you thinking about net zero in 2050?

There are a few very simple questions that are kind of yes/no for the portfolio company to answer, but it provides very valuable information to the LPs. Many of them have made their own net zero commitments and need to know whether their investments are aligned. It dovetails with the IIGCC and the upcoming ICI frameworks. They go into more depth around how to think about net zero for private equity. The EDCI is really focused on capturing measurable, quantifiable data that helps to provide initial steps. It dovetails in both cases with the IIGCC and ICI data.

It's fully consistent with how the EDCI has been designed to date. It allows GPs to start to begin the conversations with portfolio companies, where that hasn't been the case already, around: how do you start to think about decarbonization plans? What's the trajectory you want to put this business on? How do you take advantage of some of the reductions in operating costs or opportunities for new revenue for sustainability-minded customers? Starting to integrate that into the strategic development process, which we at BCG are really excited about.

Working with ICI, IIGCC, SBTi, and CDP

There has been an extensive consultation process over the last year in terms of the metrics. The metrics guidance is in place. Every GP and LP that's part of the EDCI inputs into that. There will be a number of refinements, tweaks, and updates: clarifying whether something is supposed to be collected at the end of a calendar year or an average during the calendar year, just things that help to simplify.

We're also going to provide some new examples for 2024 of how to go about doing some of these calculations, for example, around renewable energy usage. We've had all of that feedback from our members. We're also in dialogue with ICI, IIGCC, SBTi, CDP, and a number of the organizations around the world that are helping to advance on this, to help make this guidance as useful and as actionable as possible for GPs collecting this data.

Growth trajectory and value beyond benchmarking

The number of GPs and LPs participating has doubled in a year, which is really incredible work. The thing that's been fundamental to the success of this initiative is that it's by the industry, for the industry, with entities like BCG and Expand supporting and collaborating to help the industry drive progress.

As we think about year two of the initiative, we've seen more GPs, and also GPs actually being able to collect more data on more of their portfolios, both of which are very encouraging trends. We're excited for the continued momentum and usefulness of this data going forward. We have trending data at scale for the first time this year. We're going to have much more trending data next year, which is just going to help to make this as useful and actionable as possible for the industry.

Q&A: Expand's data validation process

The short answer is, yes, we do. We have a team of analysts who spent a large part of the last four months working very hard on validating every data point that came in. There's obviously a lot to validate. Particularly with this second year of submission, we suddenly have a whole extra dimension that we can validate, in terms of the annual trends.

There are various aspects to it. There are some validations we do which are very black and white, like if your renewable energy consumption is above 100%, or if your number of women on board is higher than your number of board members, and things like that. That's very immediate and a very binary thing we can automate to a certain extent. There are a lot of other things that are much more soft validation. When your emissions look particularly high, or when a company seems to have changed sector from one year to another. Things that are possible but need to be checked nevertheless.

All of those validations combined are thrown into the mix, and it essentially ends up as an email exchange with the data submitter for each GP. It can be a pretty quick one for some where the data has come in very clean. It can be much longer for others where they need to go back to their portcos and validate the individual data points. We essentially make sure that by the end of the validation process, we have closed off that email exchange with every GP, with both sides happy with the quality of data going into it. If some data points have to be excluded, then we explain why, and ensure that both sides are happy with that understanding. So that when it comes to the final results, we can be confident in the quality of that data, and the members can be confident that they're being fairly represented, and that the analysis they get back is accurate and useful.

Q&A: Pulsora's data validation

In much the same way that Ben explained the validation process that Expand undertakes with the data submitted to them, we also at Pulsora have a method of making those same automated validations. We can set these up and customize them for whatever metric our customer would like. We can also set them up to be standard validations for a library like the EDCI metrics, or for example, their SFDR indicators.

We can do validations that might be thresholds, so if a number is unreasonably large, or if it goes outside the threshold or range that it should actually be within, then our software will pick that up as an error and notify the customer. They're able to look into why, for example, a portco has made that submission and ask for a comment or reject that value, to have someone look at it again. Yes, we do have a similar validation process in Pulsora.

Q&A: Starting on EDCI

What would you say to a firm that is looking at EDCI as a framework to get started on their ESG and sustainability footprint, but is really not sure if this is the direction they want to go, or whether this is the right way to get started, or if they need to report on additional frameworks?

The EDCI is a fantastic on-ramp for starting to think about ESG in the private markets. These are meaningful metrics that the industry is converging around as a starting point on ESG topics. There is no expectation that any individual private equity fund has all of these data points for all of their portfolio companies in year one. That is a long way from where the world currently is. The mantra of the initiative is progress over perfection. If you have some of the data points for some of your portfolio, and you are committed to growing that over time, that's fantastic. That's very much in line with the EDCI's values.

You get benchmarks on the data metrics that you are submitting data for. If you don't have any carbon footprint data, you wouldn't be able to access the carbon footprint benchmarks, if that makes sense. The EDCI is a fantastic starting point if you're thinking about meaningful financial, social, useful metrics. There's also important upcoming regulation, particularly driven by the EU and California, which the EDCI will be very mindful of in the coming years.

At Pulsora, we have EDCI as one of our frameworks that we abide to, and we do see a lot of our private markets clients starting with the EDCI framework even if they're not formally subscribed to it. It tends to be a tipping point: then they formally subscribe and get the buy-in to the coalition, and eventually the benchmarking.

The future of EDCI benchmarking

One of the things that we look forward to is the initiative growing, and the dataset growing. The richer the data gets, the more we can do with it. Last year, users were only able to filter by geography and sector to a certain level of detail. The analysis enables filters that allow users this year to filter to about 10 times more detail in each of those dimensions. That gives a huge amount more richness rather than just being able to look at EMEA as a whole. You can zoom in and look at Scandinavia, or UK, and so on. That's just in year two.

The more detailed we can go, the more detail we can make those tailored benchmarks, the better it is for users. Not only in terms of filtering individual KPIs, but the correlations that we can identify and the relationships between the different KPIs. Last year, Expand and BCG and EDCI published some articles already on where we see the relationships between those different KPIs that we're capturing. We'll be doing a similar thing this year and into the future. With more data, and particularly more trending data, which makes it even more interesting, we'll be able to keep pushing out more insight and deriving more insight from this analysis as it gets richer.

All of that, as well as being academically interesting, also serves to give people more actionable data. One of the KPI dimensions we added this year was looking at GPs' hold periods on each portfolio company, and being able to provide GPs with insight into how they can achieve change across the duration of their ownership of a company. By seeing how previously, and in the trending data, KPIs change by hold period, it should give them much more confidence and insight into how to achieve change within their own portfolio.

Closing

In order for all of us and our stakeholders to come together to achieve some of these goals and the benchmarking that has been set with regards to sustainability and climate change, it is really about stakeholder collaboration. Thank you to Ben Morley and your leadership at BCG and at EDCI. Ben Baxter, for your leadership and collaboration at Expand. Pulsora is excited to be collaborating with you both.

To learn more about the EDCI and how you can join the initiative, contact esgmetrics@bcg.com. To learn more about how Pulsora can help simplify your EDCI data collection and reporting for 2024, schedule a call and a demo with one of our experts. Thank you all for your participation

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