The European Commission has defined an ambitious sustainable roadmap towards Environmental, Social and Governance (ESG) with the end goal of achieving targets agreed at the Paris Conference of the Parties (COP21)1 by 2050. One of the significant regulatory changes taking place in the European Union (EU) is the implementation of the sustainable finance disclosure regulation (SFDR) which aims to increase transparency on sustainability, prevent ‘greenwashing’ and enable comparison for sustainable investment decisions. The regulation applies to financial market participants across all asset classes, including illiquid assets whose fund managers need to prepare for its Level 2 (periodic reporting) entering into force in July 2022.
Over the past couple of years, there’s been a significant shift in the private equity (PE) world about ESG strategies. According to PwC’s Global Private Equity Responsible Investment Survey 20212, 66% of respondents rank ‘value creation’ as one of their top three drivers for responsible investing or ESG activity, whereas ‘risk management’ was their biggest driver in 2019. Without doubt, more and more firms are starting to focus on ESG as their awareness of it continues to grow. However, the challenges to overcome in order to be ‘ESG ready’ are significant for PE firms.
In fact, most financial market participants (asset managers such as AIFMs and UCITS managers, pension funds, insurance companies and banks) and financial advisers (both investment and insurance) are under pressure to address demands around ESG criteria. Private markets, meanwhile, face their own set of challenges – one being the relative scarcity of data in general in the PE industry.
1Adopted by 196 Parties at COP 21, the Paris Agreement on climate change entered into force in November 2016 to limit global warming to well below 2°C, preferably to 1.5°C, compared to pre-industrial levels.
2 Global Private Equity Responsible Investment survey, PwC, July 2021.
Read on to learn how Intertrust Group can help you navigate the complexity, to become ‘ESG ready’.
What we are seeing in the market
According to the Global Impact Investing Network3, PE is the most common asset class in the impact investing industry and a strong portion of PE focused investors (86%) report that they are performing in line with or exceeding their financial performance expectations.
To date, more than 500 PE firms are signatories of the Principles for Responsible Investment network (PRI) and are already integrating ESG practices into their operations. And they have every reason to demonstrate their commitment towards responsible investing. A Bfinance report4 published in February this year revealed that 60% of asset owners are ‘unlikely’ to hire equities managers that are not signatories of the PRI.
There are some obvious signs that the market is transforming with ESG considerations at its heart. In April 2021, Morningstar Manager Research5 reported that European sustainable funds attracted inflows of €120 billion in the first quarter of 2021, which is 18% higher than in the previous quarter and represents 51% of overall European fund flows.
The environmental impact of Covid-19 lockdowns around the world, as well as evidence of climate change across the world, have increased public interest in sustainable investing. A recent study by Casey Quirk shows that investors are expected to drive $3.2 trillion net into sustainable strategies by 20256.
As the focus on ESG investment grows, PE fund managers need to start gathering complex qualitative data. From 2022 onwards, they will be required to provide multiple reporting frameworks and requests while also assessing their ESG risks and opportunities. Time is of the essence here. It’s imperative to start gathering ESG data now, to embrace the growing demand for sustainable investments and comply with the impending waves of new regulation in the coming years.
3 Global Impact Investing Network (GIIN), Impact investing decision-making: Insight on financial performance, January 2021.
4 ESG asset owner survey, how are investors changing, Bfinance, February 2021
5 Morningstar Manager Research, April 2021
6 It’s not easy being green. Managing authentic transformation within sustainable investing, Casey Quirk, a Deloitte business, 2021
How does it impact you?
Last April, the European Commission issued a comprehensive package of measures to help direct financial flows towards sustainable activities in the EU. Part of the EU Taxonomy regulation will come into force on 1 January 2022, so the clock is ticking for private fund managers headquartered or present in Europe.
With this EU regulatory push and an increase in investor demand, sustainable assets are on the rise and set to soar to $13 trillion (€10.9 trillion) globally by 20257. According to research from asset management consultancy Casey Quirk, Europe, the Middle East and Africa make up $9.5 trillion, or nearly three-quarters of these assets.
One of the first obstacles managers face when pursuing the opportunities in this growing market is gathering the relevant ESG data and running analytics.
7 It’s not easy being green. Managing authentic transformation within sustainable investing, Casey Quirk, a Deloitte business, 2021
- We support all three factors of ESG with specialized resources and expertise, allowing clients to focus on their core business.
- We meet international standards and local requirements across the whole value chain, with a one-stop-shop approach.
- We offer solutions that evolve with the ever-changing market and regulatory requirements, leveraging our expertise across 30 countries, so you can rely on up-to-date ESG data.
- We help drive efficiency in the implementation of your ESG strategy, with a global delivery model, and a best practice technology-enabled solution.
- We deliver transparency on ESG performance, enabling the active management of ESG KPIs and data to drive your decision making.
What makes us different?
We’re committed to the United Nations Global Compact and do business responsibly by aligning our strategy and operations with the UN Ten Principles on human rights, labour, environment and anti-corruption. The central theme in our ESG programme is ‘leading by responsible business practices’.
We’re ideally positioned to help you navigate the complexity.
We can help you navigate the complexity and fast track your journey towards implementing ESG measures and become ‘ESG ready’.