It started with a risk alert.

In April 2021, the US Securities and Exchange Commission fired a warning shot to private funds and other investment businesses. The SEC had identified four areas in which claims about ESG could leave managers exposed.

Then the regulator issued its exam priorities for 2022. Items one and two were private funds and ESG. On the latter, the document stated: “There is a risk that disclosures regarding portfolio management practices could involve materially false and misleading statements or omissions, which can result in misinformed investors.”

Then came proposed rules around climate disclosure. In March this year, the SEC unveiled draft requirements for large publicly listed companies to start reporting climate-related business risks, as well as greenhouse gas emissions data. As it stands, private companies are not scoped in. That does not mean they shouldn’t be paying attention.

So what’s next? The regulator is likely to propose additional requirements for “investment companies and investment advisers related to [ESG] factors, including ESG claims and related disclosures,” according to a notification posted late last year. Whether private funds get scoped into this is unknown at this stage, but who would bet against it?

In a panel session hosted by affiliate title Regulatory Compliance Watch, the message was: bring it on.

Admittedly the experts had interests to declare, being part of an advisory ecosystem that benefits from increased regulation. But the reason for their excitement was more than just commercial.

“One of the reasons I am excited by the SEC proposals [on climate disclosure] is that it is a step in the right direction of standardizing ESG as an industry,” said one panellist. “It creates an opportunity to standardize not just the environmental part, but also some of the social pieces.”

New rules that focus on disclosure get to the heart of one of the defining issues of ESG in private markets: standardized data.

The weight of investor preference is a powerful force when it comes to promoting standardized practice. Industry-led initiatives like the ESG Data Convergence Project are making progress.

But the investor community is fragmented (not all investors want the same things) and, even while LPs hold the purse strings, they do not get to dictate terms of engagement. As one consultant dead-panned it to me last week: the pendulum of power never really swings to LPs. The power of the regulator may prove more decisive.

Regulation is rarely greeted with excitement. Maybe we should make an exception here.