What do those at the coal face of ESG in private markets – heads of sustainability at private fund firms – think about the past 12 months? Affiliate title New Private Markets asked ESG heads to reflect on the year gone by and look ahead to 2023.
The backdrop was complicated
Sustainable investment professionals have been operating against a backdrop of “existential debate about what exactly ESG should be”, says one respondent. The well-documented political opposition to ESG in the US meant some investment managers found themselves picking a narrow path between sustainably minded investors on one side and “anti-woke” investors on the other. This led to managers “hemming more closely to fiduciary and value creation arguments for their ESG goals, while de-emphasising sustainability outcomes as a goal in their own right”, says another respondent.
The world threw up plenty of reasons to support that fiduciary argument: extreme weather, energy insecurity, human rights violations. These “resulted in a growing mainstream realisation that private investors must manage these externalities in order to create long-term sustainable value, but also have a role in creating positive environmental and social outcomes to address them”.
“Regulators on both sides of the Atlantic cracked down on greenwashing; globally there was increased regulatory attention on strengthening standards,” says one sustainability chief. EU rules in particular were singled out as having “a big impact” and helping to “provide further transparency”. “The EU Final SFDR Regulatory Technical Standards and the EU Green Taxonomy are huge steps towards industry alignment,” says another. “These classifications and disclosures should provide some clarity in the communication of sustainability performance and reporting.”
Progress on data
The ESG Data Convergence Initiative was repeatedly singled out, described as a “game-changer”, “a great step forward” and showing “there was a real need for more focus and clarity on ESG reporting expectations”.
For many respondents it was the broader theme of collaboration within the industry that stuck out, with multiple references to the work done by initiative Climat International, the private equity industry collaboration on climate. Reaching more than 200 members “was pivotal” says one ESG head, while the “breadth of very insightful guidance published through this voluntary initiative is remarkable”, says another.
Impatience for action
While all our ESG heads were able to point to signs of progress, there were clear signs of frustration with the lack of pace and fear that “long-term aspirations and reporting frameworks distract us from achieving real, immediate improvements in managers’ portfolios” as one respondent puts it.
Says another: “If we spend too much time in working groups arguing about details at the margins of the multitude of climate frameworks, we are misallocating valuable and limited ESG resources that could be working to drive actual decarbonisation.”
One ESG head cautions: “It is great to have companies and managers making pledges, but time is ticking, and we need results.”