Outsourcing offers solution to meet growing ESG demands

New regulations mean 2021 will be a big year for sustainable investing in the European Union.

The EU has taken the lead in trying to define what ‘sustainability’ means in practice.

Under the ‘EU Taxonomy’ legislation announced in 2020, the criteria will be clarified this year by which an economic activity will qualify as ‘sustainable’ based on its contribution to environmental, social and governance (ESG) objectives. The Green Bond Standard will require the projects financed by bonds to be aligned with the Taxonomy and in March 2021 the Sustainable Finance Disclosure Regulation will also bring more transparency to the finance industry. These new regulations are likely to set benchmarks for standards globally.

This growing focus on sustainability in finance is reflected in new research* Intertrust Group conducted jointly with Global Custodian that found nearly half (48%) of chief financial officers (CFOs) at private capital funds in Western Europe (excluding UK) expect their investors to be looking for access to live or daily updates on ESG information relating to their portfolios, while a further 29% expect demands for weekly updates.

The focus on ESG is certainly booming and is being reflected in the outperformance of ‘responsibly invested’ funds as investors chase the assets higher.

The most positive attitudes towards ESG appear to be coming from the younger generation, who will be tomorrow’s wealth holders. Support for ESG funds is only likely to grow, as will expectations that they make it clear what positive impacts they are having on the environment and society.

The figures are part of wider findings outlined in a new report entitled The future private capital CFO: Evolving in a digital age.

The findings show that over the next decade, CFOs in Western Europe expect their limited partners to require data updates with increasing frequency. Nearly two in three respondents (63%) expect their investors to be looking for access to live or daily updates on portfolio performance, 50% on cybersecurity and 35% on operational service level agreements (SLAs).

The emphasis on portfolio performance is symptomatic of the modern expectation to have information instantly to hand. It might seem surprising in relation to private capital funds, most of which calculate NAVs on a monthly or quarterly basis. However, there are other key performance indicators of performance, such as sales figures, cash and debt levels, rent collections and SLAs, which are extremely relevant and do change on a daily or even real time basis.

It is perhaps surprising that only half expect live or daily updates on cybersecurity to be required. Cyber threats are very much real-time and the sooner breaches are identified the sooner they can be dealt with.

These growing expectations pose a major challenge for private capital funds, which have always tended towards lower transparency than their mainstream peers because of the confidential nature of the deals they conduct. But if the funds do not meet these demands then they risk being shunned by investors who will go to general partners that will give them the information they want.

Why outsource?

How will CFOs meet these increasing demands for more information? The most popular response is to invest in technology, which was cited by 28%, followed by increasing the size of the in-house finance team (26%), and investing in distributed ledger functionality (18%).

Around one in eight (12%) say they will outsource more functionality while another 12% say they will retain their existing balance between in-house and outsourcing.

The level of outsourcing responses does seem a little low given Europe tends to adopt it as a strategy more than other regions. GPs should remember that it solves the end-to-end need for the whole industry to become more transparent, whether catering for the smallest of special purpose vehicles or complicated management companies.

Most importantly, it enables GPs to focus on their core function, which is raising and investing assets.

Download the report

*Source: Global Custodian in partnership with Intertrust Group; global sample of 300+ chief financial officers at private capital funds were surveyed between 20 November 2020 and 26 January 2021, including 70 in Western Europe