This post is an excerpt from the recently published PitchBook Analyst Note: ESG and the Private Markets, written by Hilary Wiek, CFA, CAIA, Lead Analyst, Fund Strategies & Performance.

Click here to read the full note.

What and how to report

Once an investor—be it an LP or a GP—comes around to the benefits of the ESG framework, the next step to consider is implementation. What risks should be considered and managed? What do various constituencies want to see? Most of all, LPs and GPs want to know the most material risks and have them reported on in a way that allows for comparison and aggregation. Based on our 2020 Sustainable Investment Survey, both LPs and GPs want a better way to measure and report sustainable investment activities and risks.

Measuring and reporting the material factors has complicated the widespread integration of ESG factors into investor and company thinking. It is difficult enough for a company to identify and measure the most material ESG risks to their business, but then a fund manager with a diversified portfolio could get wildly different reports from each of its companies. Stepping up a level, that fund manager’s investors—not to mention ESG rating agencies—will demand to see consolidated portfolio-level ESG factor exposures. It is a complex issue to say the least. Investors want comparable and reliable data—something sorely lacking in the early iterations of Corporate Social Responsibility (CSR) reports, which often promoted carefully cultivated, favorable vignettes that companies chose to selectively highlight.

Many organizations have attempted to tackle these identification and reporting difficulties, which in turn has led to a proliferation of “standards” that cause even more confusion. If one company or asset manager uses one standard and others turn to different standards, then the recipient is still left with a mishmash of data that is difficult to turn into information. However, some standards are being widely adopted and progress has been made toward a global agreement on the best way to approach this complicated issue.

United Nations Sustainable Development Goals (SDGs)

In 2015, all UN member states adopted the 2030 Agenda for Sustainable Development, though this was the culmination of work that began decades earlier, developing over many summits focused on putting the planet and its people on a better path. With companies, governments, and investors all focused on the 17 SDGs, the UN believed improvement could be effected across areas as varied as “Responsible Consumption & Production” and “Peace, Justice & Strong Institutions.” One downside from an investor’s perspective is that the goals were not designed solely for investors or companies, so there is not always a clear path from an SDG to an investment opportunity. Given the global acceptance of these goals, however, many investors are adopting the SDGs and reporting on which goals their portfolios are impacting. As a result, many of the other standards or frameworks, which are more focused on investor uses, have mapped their taxonomies to the SDGs, thus leading to a dual system of reporting being produced and received by many investors.

The SDGs align more closely with impact investing—seeking the double bottom line of financial returns and measurable social or environmental improvement—than with the identification and measurement of ESG factors. Even as an impact investing framework, the SDGs fall short. They were created as goals for governments, businesses, and charitable organizations to direct efforts toward—not all of which involve profitable investment opportunities. The Global Impact Investing Network’s IRIS+ framework was developed with a nod to the SDGs but was meant to represent investable opportunities for market participants. We will explore impact investing and the IRIS+ framework further in a future note.

Sustainability Accounting Standards Board (SASB)

The SASB, a US-based organization, spent several years consulting with investors, companies, and asset managers to develop standards that any company could utilize in order to identify which of the 26 sustainability-related business issues are relevant for their industry.9,10  Recognizing that no one-size-fits-all approach existed, the standards were designed to identify the material risks that each of the 77 industries faces and provide accounting metrics that would cover the reporting of those risks.

As an example, the sector Extractives & Minerals Processing includes the Construction Materials industry. Greenhouse Gas Emissions is a risk flagged for this industry, with two accompanying accounting metrics: one highlighting emissions to be measured and the other discussing strategies for emissions management. The seven industries in the Consumer Goods sector, however, have little material risk to Greenhouse Gas Emissions, so the SASB does not recommend that these businesses provide any reporting on this topic. Consumer Goods companies do, however, face material reportable risks related to Product Quality & Safety.

While the SASB framework was initially rolled out to the public market community, such as public companies and stock analysts, nothing precludes private market participants from adopting it. Any company can recognize itself among the 77 industries and find guidance on how to measure and report on the material risks that industry faces. With widespread adoption of the Standards, reporting will emerge that is both comparable and able to be rolled up into cohesive portfolio views— something for which both public and private market investors have been clamoring.

Global Reporting Initiative (GRI)

The GRI got its start in 1997 with its first sustainability reporting framework. It focuses primarily on a company’s impacts on the world—in contrast to the SASB, which is concerned with the ways the world may affect the company. The GRI philosophy is one of stakeholder value, not just shareholder value, which is a concept that is gaining global traction as pursuing profits alone has been recognized as an incomplete objective for a sustainable organization.

On April 8, 2021, the SASB and the GRI co-released a guide to the ways their approaches complement each other. In their words, “GRI defines sustainability reporting as the practice of companies disclosing the most significant economic, environmental and social impacts that arise from their corporate activities,” while “SASB Standards help companies communicate effectively with investors about performance on the subset of industry-specific sustainability issues that are most relevant to risk, return and long-term enterprise value.” The two groups believe that they can coexist and be complementary to each other. The recent report highlights the ways some companies are using them in tandem.

Sustainable investment framework comparison

Standard Purpose Strengths Drawbacks


Improve the world Widespread recognition and adoption Not always investable goals


Recognize material business risks Industry-specific guidelines, material business risks

Stakeholders are secondary to inbound business risks

GRI Report on a company’s impact on the world Stakeholder value framework

Ignores some risks to companies

Implementing ESG in the private markets

In the public markets, conflicting forces exist wherein Wall Street wants every quarter to be better than the last, while investors with a longer-term view pressure companies to spend now to mitigate potential future risks. Many large investors have been using their significant ownership stakes to agitate for public companies to take a longer-term view and manage and report on the material risks faced by their businesses. In recent years, ESG-related shareholder resolutions have been on an upswing, and some are even finding success. (See examples here and here.) This avenue does not have a true corollary in the private markets, however.

Even without shareholder pressures, private capital fund managers are feeling pressure from LPs and other stakeholders to think within a sustainable investment framework. Our 2020 survey indicated that GPs are increasingly receiving questions from potential investors. Many are working to incorporate sustainable investment thinking into their business models. While we are a long way from standardized reporting that LPs can pull together from disparate managers to get a total portfolio view of their risks, movement is nonetheless happening.

Some posit that private equity enjoys the benefits of being private—particularly not having to answer to shareholders every quarter—and this accounts for some of ESG’s slow progression into private market funds. Another reason given particularly in the VC universe is that considering ESG factors would be too burdensome for a young company; it would be expensive and distract from growing the business. The objections reflect narrow, shortsighted thinking, however.

A good case can be made that the private space is exactly the right place to incorporate sustainable investment ideas. For starters, private markets investors have the luxury of longer-term thinking—as opposed to the public markets, which are hemmed in by quarterly expectations. In addition, when it comes to startups, it is far better to start a company with proper E, S, and G principles than to try to retrofit a mature company. One considerable example relates to diversity. For well over a decade after founding, most economic benefits going to company employees will typically flow to the founders rather than the rank and file. If the founders consist of one demographic and fail to offer significant stakes to other demographics, then the economic benefits that could spread to a more diverse set of stakeholders remain limited. When the founders eventually sell, they receive capital to start more businesses, thus further exacerbating these economic inequities.

On the other hand, if the founders were to start out with a diverse group, then not only would economic benefits flow to underrepresented populations, but the company would also be in the hands of a group better equipped to make decisions than a homogenous body. If VC firms insisted that targeted companies build diversity into their businesses from the start, it would have a greater immediate impact than the recent requirements that public companies set up long-term plans to incrementally improve their diversity profiles.

Considering the amount of money involved and the fact that signed LP agreements are rarely renegotiated, it is difficult for all but the largest LPs to influence GPs disinclined to consider ESG factors. Smaller LPs often commit in a vacuum and are unlikely to unite to make demands of GPs during LP agreement negotiations. In fact, some LPs feel it is not their place to try to influence a GP’s investment process, as the blind pool aspect of these funds already presupposes that the LP has faith that the GP is best equipped to make decisions on behalf of the fund’s investors.

Some investors are coming together to effect change, however. The Institutional Limited Partner Association (ILPA) is currently collecting best practices for LPs implementing ESG programs. LPs can submit ideas across several areas, including Organizational Policy and Infrastructure, Due Diligence and Investment Decision-Making, and Managing GP Relationships. Each of these has subcategories as well, including resources LPs can use to develop or improve their own practices.

In June 2019, ILPA released Principles 3.0 for LPs. These principles, the origins of which date back to 2009, cover economic terms that a variety of investors came together to deem best practices for private market funds. The latest edition included a section on ESG policies and reporting. To quote ILPA: “GPs should consider maintaining and periodically updating an ESG policy, provided to all LPs or to potential LPs on request. The Principles also recommend how GPs can demonstrate their commitment to ESG and identify reporting frameworks to help LPs understand, verify and assess GP processes for ESG integration.”

What is leading private markets investors into ESG?

In our recent Sustainable Investment Survey, investors of all stripes demonstrated significant interest in and progress toward implementing ESG risk factor approaches. Some GPs came to ESG thinking independently by recognizing the benefits of adopting the risks into their investment processes. Others are responding to the growing number of LPs that ask ESG-related questions as part of their due diligence and that may, on the margin or even as a requirement to invest, pressure GPs to incorporate sustainable practices as part of their investment processes.

Some GPs, upon recognizing that ESG is influencing LP commitment decisions, may insert buzzwords into their due diligence materials to signal that they have adopted ESG principles—but may be doing little to walk the walk. This practice, called greenwashing, is drawing efforts to bring truth in advertising to this space. Not only are many LPs becoming adept at laying asset manager ESG claims bare, but regulators are also requiring that asset managers accurately and honestly represent themselves and their strategies.

European Commission’s Action Plan on Sustainable Finance

In March 2021, the sustainability-related disclosure requirements announced by the European Commission in  2018  were implemented. The action targets asset managers and financial advisors in an attempt to combat greenwashing. The requirements do not require asset managers to incorporate sustainability into their thinking, but they do require disclosures about actions they are taking, if any, on a number of sustainable investing topics. While this action does not apply generally to US-based asset managers, if they want to sell into the European Economic Area, they will need to comply. Throughout 2020, we heard from GPs scrambling to understand these new requirements and how to properly incorporate sustainable investment practices.

US Securities and Exchange Commission (SEC)

While the SEC has not gone so far as to require itemized disclosures from all asset managers about their sustainable investment practices, in February 2021, it did announce the creation of a Climate and ESG Task Force in the Division of Enforcement. The group will develop initiatives to proactively identify ESG-related misconduct,” which means it will find and hold responsible those who make unsubstantiated claims. The US is currently playing catch-up on several sustainability-related fronts after several departments within the previous administration made rules and announced opinions that set back efforts to normalize ESG as an acceptable element in managing investment portfolios.


Overall, regulation and LP pressures seem to be pushing the private markets toward the precipice of widespread ESG adoption. Measurement and reporting tools are coming together, LPs are turning their attention from public market programs to private market adoption, and some GPs are beginning to agree that the risk factors identified as part of the ESG framework are worthy components of the investment process.