Despite advancements in ESG reporting, complex data challenges persist. To truly make a difference, firms need to leverage accurate, reliable, and objective ESG data — but many remain ill-equipped as we progress into 2025’s reporting cycles.
Featuring expert insights from our recent webinar on gearing up for a new reporting season, this article explores challenges to effective ESG reporting in the private markets and tips for navigating them.
Challenge #1: Complex and Inefficient ESG Data Collection Processes
ESG data does not exist in isolation, but resides across different departments, functions, and external entities. This decentralized, fragmented nature, coupled with the scale and granularity of data and the reliance on spreadsheets as the primary source of ESG data management, adds complexity to an already arduous task. And firms are struggling to keep up — according to a Bloomberg survey, 41% of respondents said that handling constantly evolving and new ESG data was their leading data management challenge, due to a lack of bandwidth and how resource-intensive the process could be.
If not addressed, these data troubles will have ripple effects across the entire reporting process. Not only will firms be unable to paint a complete and credible picture of their portfolio’s sustainability performance, but they will also lack the insights to identify risks, drive value creation, and course-correct in preparation for future reporting cycles.
The Solution: Streamline Internal Processes for Efficiency
With ESG reporting being a cross-functional undertaking, moving away from manual processes can help improve efficiency in data collection and collaboration across teams. Leveraging a specialized ESG software solution, for instance, can help streamline the ESG data collection process across the portfolio. A platform can act as a centralized repository, seamlessly aggregating data from disparate sources and enabling real-time monitoring of material risks and metrics.
Additionally, with many organizations and regulatory bodies pushing for ESG data convergence measures, interoperability among reporting standards can help reduce the burden of collecting disparate data, thereby simplifying reporting processes. Convergence of metrics also improves data comparability, contributing to reliable and meaningful industry benchmarks and year-on-year performance insights.
Challenge #2: Ensuring Accurate Data From Portfolio Companies
Another major setback for ESG reporting in the private markets is in the quality of data collected from portfolio companies. Several factors contribute to this, with varying data maturity levels, resource constraints, disjointed workflows, and evolving regulatory disclosures accounting for some of the more common challenges. Each portfolio company may also interpret ESG metrics differently, further adding to the data complexity.
Additionally, some portfolio companies may view ESG initiatives as a checkbox exercise that diverts resources from core business operations, indicating a clear disconnect between GP expectations and portfolio priorities.
The Solution: Help Portfolio Companies Take Ownership of Their Data Management
The goal is to make ESG data collection a seamless and integrated process for portfolio companies without disrupting their day-to-day operations. For effective portfolio buy-in, clarify expectations from a sustainability perspective. This can range from aligning priorities to sharing how they can benefit from owning their data narrative to showcasing their sustainability impact beyond compliance. Establishing clear information governance and data collection guidelines can take the guesswork out of the data collection process as well.
If portfolio companies lack dedicated ESG subject matter expertise or financial support, empowering them with the right resources, be it via capacity-building initiatives or defined data collection processes, can alleviate the burdens of manual reporting. Additionally, establishing internal guardrails, such as data reviews, can help address data gaps and improve the accuracy of the data collected. Putting these parameters in place promotes better transparency and accountability and leads to more informed decisions that can help create value, manage risks, and reaffirm an organization’s commitment to sustainable operations.
Challenge 3: Preparing for External Assurance
Without a single source of truth, validating large volumes of data or third-party information is extremely time-consuming and resource intensive, and should not be underestimated. Data assurance is now a mandatory aspect of select regulatory disclosures, such as the Corporate Sustainability Reporting Directive (CSRD), adding further pressure on firms to ensure the accuracy and completeness of their ESG data.
The absence of robust data governance protocols may also lead to discrepancies, inconsistencies, and even external manipulation that can compromise the quality of collected data, calling into question the integrity of what is being reported.
The Solution: Seek Expert Support for Assurance
Creating an audit trail is a foundational step when preparing for assurance. Communicate data sources, methodologies, and data validation techniques used in the data collection and reporting process to contextualize the figures behind each metric. According to PwC, 95% of investors find that reasonable assurance (the level of assurance obtained in an audit of financial statements) gives them confidence in sustainability reporting to a moderate, large, or very large extent. Leveraging the expertise of third-party assurance providers mitigates greenwashing risks and safeguards the integrity of your reported data.
To ensure your data is assurance-ready, adopting an ESG data management software like Novata can help. Novata acts as a single source of truth, strengthening compliance by tracking and managing source documentation and data logs that may be needed by assurance providers during audits.
As ESG reporting season approaches, the key to success lies in creating streamlined, efficient processes that ensure accurate, reliable data while maintaining transparency and accountability. With the right technology and a strategic approach, firms can not only meet regulatory requirements but also unlock valuable insights to drive sustainability and long-term value creation across their portfolios. Learn more about how Novata can help.
