Fund services hot topics: ESG

Emphasis on ESG is reaching a crescendo. The pandemic has heightened awareness of environmental considerations. Meanwhile, understanding of social and governance concerns has intensified, putting the E, S and G on an even footing for the first time.

“The pandemic, combined with social movements such as BLM [Black Lives Matter], have accelerated the industry’s awareness of environmental and societal issues and risks, pushing forward the agenda of aligning ESG-related issues with financial returns and decision-making,” says Elaine Chim, head of private equity for America and APAC for Apex Group.

There is no doubt that accessing and analyzing meaningful ESG data from privately held portfolio companies is challenging, however. While the listed space has a multitude of data collection solutions and indices at its disposal, there are few reputable, independent, global providers for private markets.

(In)consistency

Meanwhile, one of the key challenges for private markets is addressing the inconsistency in how ESG is reflected in investment choices and the absence of an accepted industry or international standard on data formats. “Private markets have been seeking an independent, end-to-end offering not only to ensure relevance, consistency and longevity surrounding ESG, but also to simply create better, more resilient, profitable and valuable companies,” says Chim.

But a wave of upcoming regulation means it’s time for private market managers, and their administrators, to step up. The EU Sustainable Finance Disclosure Regulation was implemented in March and requires financial market participants and their advisors to incorporate sustainability risks across all aspects of their operations – including disclosures, integration into remuneration policies, risk policies, the investment process, product governance and wider internal processes and systems.

And the regulation does not only apply to European managers. “At first glance, non-EU managers could be forgiven for believing they do not fall in the scope of the SFDR and dismissing this as not relevant to them,” says Chim. “However, the SFDR applies to entities operating or managing in the EU or marketing their products into the EU – even if they are headquartered in APAC or the US. As with any aspect of financial services, the implications of this regulation are global.”

Managers and service providers will need to invest quickly and expansively in the technology and data analytics needed to fulfill their obligations. “I think we’re going to see an emergence of data providers in the ESG space that are able to capture the benefits of machine learning and AI to create better tools and access for GPs to the necessary data,” says global head of fund sales at Intertrust Jonathan White.