How private markets firms are starting to shift towards expert led, cost-effective ESG monitoring and reporting services allowing in-house ESG talent to remain more “front office” strategic leaders.
For almost all private markets firms, ESG reporting obligations have increased dramatically in recent years. This has been driven by the growing appetite of limited partners (LPs) for qualitative and increasingly quantitative data from their general partners (GPs). The reporting burden on GPs is only set to increase as ESG regulatory reporting obligations begin to crystallize —most notably for those whose funds, investments and operations are exposed to EU regulations.
In response to the growing importance of ESG, many GPs have hired Heads of ESG, Chief Sustainability Officers (CSOs) and other sustainability talent to generate reporting for LPs over the past 3-4 years. These individuals, many of whom had relatively little experience working within GPs and are typically ESG generalists as opposed to being experts in a single area of ESG (e.g. climate, DEI, etc.), have been required to provide strategic direction on sustainability (often across a number of different strategies and funds), act as the face of the firm’s ESG program internally and externally, and engage with LPs, portfolio companies and other key stakeholders to demonstrate the GP’s commitment to responsible investing as well as driving the ESG program forward each year.
Those GPs that have yet to hire a CSO have asked their leaders (e.g., COOs, CFOs, GC and/or Investor Relations personnel) to dedicate more time to this area. Other GPs have strengthened their teams by hiring mid- and junior-level ESG talent (often scarce) to handle the routine, but increasingly burdensome, annual ESG monitoring and reporting tasks, adding significant expense to the GP.
With a more challenging fundraising environment over the last 18 months, GPs have begun to scrutinize budgets resulting in some staff reductions. This has raised questions about efficient cost allocation and whether certain middle and back-office roles can be outsourced to external vendors, with the associated costs borne by the underlying funds who benefit from the services. This conversation has naturally extended to ESG.
Cost-Effective Outsourcing ESG Monitoring and Reporting
While each GP faces its own unique pressures and LP relationships, the industry is converging on a standardized approach for the annual workload required on ESG. Routine tasks related to annual or quarterly ESG monitoring and reporting are increasingly being outsourced to trusted ESG service providers. While the role of a CSO cannot generally be outsourced, the monitoring and reporting lift can be.
A parallel can be drawn as GPs often outsource routine fund administration tasks to external teams (via outsourcing or co-sourcing relationships). The same could be said of GPs who engage external counsel for due diligence, negotiation, and investment agreement preparation. In both cases, the external advisors act as an extension of the GP’s in-house team.
LPs have historically borne the indirect costs of fund administrators, lawyers and other advisors throughout the life of their fund investments (indeed the rationale for doing so is baked into almost all limited partnership agreements), creating a natural extension of this practice to LP-mandated ESG reporting.
So, what does an outsourced ESG monitoring and reporting model look like in practice?
A Hypothetical Example
Situation: ABC Capital manages $20 billion of assets through various funds. Currently, ABC Capital has investments into 30 portfolio companies across the US and the EU.
In 2022, ABC Capital launched an Article 8 aligned SFDR fund and hired its first CSO.
The CSO led the firm’s efforts to institutionalize the ESG program (across this and legacy funds and within the firm more generally) which included working with the fund’s investment teams and external advisors to develop the fund’s sustainable investment strategy.
She was also integral to the fund’s capital raising efforts and the reframing of ABC Capital’s approach to responsible investment.
She spoke regularly with LPs about the firm’s ESG efforts, commitments and ambitions, and generally shored up an area for ABC Capital where there was a perceived weakness. The hire also underlined to LPs and other stakeholders that ESG is a core component of meeting the firm’s fiduciary duties and stewardship commitments.
As ABC Capital launched more funds and increased the number of its investments, the CSO hired a junior to help her oversee/manage ever-increasing ESG stewardship and reporting obligations.
Even with this first hire, the CSO foresees the need to hire more talent to support the increasing ESG reporting obligations on the firm while progressing its sustainable strategy. However, ABC Capital’s founders believe it is difficult to justify more internal ESG hires whereby ABC Capital’s ESG team would be double the size of the firm’s Investor Relations team and three times the size of its Legal & Compliance team.
Solution: Faced with increased reporting obligations and a shortage of qualified staff, the CSO engages an ESG tech platform to help with the firm’s annual monitoring. While the cost is relatively modest, after the first year it became clear that this would not replace the need for experienced sustainability professionals to analyze and report on the data from the portfolio companies. In other words, there was no “quick technology fix.”
In discussion with the firm’s GC and having reviewed the underlying fund documents, the CSO realizes that almost all of the annual ESG monitoring and reporting work can—and should be—allocated across the firm’s funds.
Following internal discussions, the CSO opts to seek the assistance of an experienced third-party ESG advisor—instead of ABC Capital hiring 3 to 4 full-time employees.
She initiated an RFP process to assess various ESG service providers’ capabilities as it relates to handling the project management and analysis of the annual ESG questionnaire process working with the ESG tech platform.
Outcome: After presenting her recommendation to her partners, ABC Capital agrees to engage Petra Funds Group, a recognized ESG consultancy and managed services provider, to handle the scope of work in year one and asks her junior employee to oversee the process from start to finish. This is not only positive from a cost perspective for ABC Capital but also from an internal bandwidth point of view. It ensures that the in-house ESG team can focus on strategic direction and value-added areas rather than getting mired in the minutiae of annual ESG monitoring and reporting.
The fees of the ESG service provider (Petra in this case) are paid on a quarterly basis and allocated pro rata to the underlying funds. Each LP sees a fractional increase in their partnership expenses but receives better quality ESG data on time. The GP receives data that can be used as part of its sustainability strategy and value creation plans.
By engaging Petra, ABC Capital is able to manage costs and reduce the operational burden around retaining and mentoring staff. As a result, the CSO and her junior can focus on more “front office” tasks, such as speaking to existing and prospective LPs and generally being more strategic in their role. They will also be able to leverage the breadth and expertise of Petra’s ESG Advisory team who will provide guidance on best practices and advice on how to drive ABC Capital’s ESG program forward as part of the ongoing engagement.
Like her CFO or GC, the CSO remains accountable for Petra’s outputs and advice which is why the selection of what will become a trusted long-term partner is key.
A More Efficient Solution
The evolution of sustainability reporting in private markets has led to significant changes in how GPs manage their ESG obligations. As LPs demand more detailed and frequent data, the role of CSOs and their teams has become crucial. However, the increasing complexity of ESG reporting and the focus on cost management by PE firms have prompted many GPs to engage ESG service providers for routine monitoring and reporting tasks (in a similar vein to how CFOs outsource/co-source to fund administrators or how GCs outsource to law firms).
While the core strategic responsibilities of a CSO remain in-house, outsourcing to specialized ESG service providers offers a viable solution to manage costs and maintain data integrity. This approach allows GPs to balance efficiency with the growing demands of sustainability reporting, ultimately benefiting both GPs and LPs.
The industry’s shift towards this hybrid model—combining internal strategic oversight with outsourced operational tasks—demonstrates a pragmatic response to the escalating demands of ESG. As private markets continue to adapt to these new expectations, the balance between in-house expertise and outsourced support will likely become more standardized, ensuring robust, transparent and timely sustainability reporting across the asset class.
Petra Funds Group is a leading global provider of fund administration, middle and back-office support, regulatory compliance, and ESG services for private equity and private credit funds. Founded by private equity executives in 2021, Petra delivers tailored services to our valued client base from offices in the U.S. and Europe. Our coordinated fund administration solution and best-in-class technology enable our clients to scale their operations, reduce costs, and focus on their core competencies. For more information, please visit: www.petrafundsgroup.com.
