Private market insights: Unleashing potential in the ESG era

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As investors' appetite for ESG investments grow, fund managers are increasingly asked to deliver complex private equity data on demand

What does the future hold for private capital fund managers when it comes to Environmental, Social and Governance (ESG) regulation and reporting? What are the challenges as investors demand more private equity data?

This was the hot topic at a recent event, Private market insights: Unleashing the potential in the ESG era, hosted by Intertrust Group in Luxembourg.

The expert panel, moderated by Tony Griffiths, Director of Content at Global Fund Media, comprised:

• Ahmed Ouamara, Head of Sustainability Operations, LuxFLAG
• Antonello Argenziano, Product Director, Intertrust Group
• Oriane Schoonbroodt, Director of Sustainable Finance & Strategy, PwC
• Jane Wilkinson, Founder of advisory firm Ripple Effect and an independent director

They discussed challenges in private markets, including the relative scarcity of private equity data, how to generate the required data and whether firms are developing ESG strategies quickly enough.

Increasing demand for private equity data even in illiquid investments

The discussions came against a background of increasing data needs within the private equity market. Earlier this year Intertrust Group conducted research with Global Custodian to ask chief financial officers (CFOs) at private capital funds about industry trends.

The report found that both regulators and investors are demanding more information on a daily or even live basis from CFOs. Specifically, demand for ESG as well as diversity and inclusion data is growing.

In the decade ahead, 55% of limited partners (LPs) will seek live or daily updates on ESG, the report predicted. This is 10 percentage points higher than CFOs expected.

The report found that one quarter (26%) of Western Europe CFOs anticipate having to supply daily updates on ESG (33% in the UK). And 95% of CFOs said LP expectations on ESG were very important or moderately important. Globally, 58% of CFOs said it was very important, while in Western Europe that figure was 48% (68% in the UK).

Being ESG ready while complying with private equity regulations

As increasing numbers of investors focus on ESG criteria, they request more detailed data from private market fund managers. However, creating, interpreting and reporting private equity data involves challenges.

"There is still a huge disparity in the market between managers. Some managers have been integrating ESG in their investments for 10 years," said Argenziano. "Overall, when you look at regulators' expectations on how ESG is being reported, it is probably a little bit behind schedule."

Ouamara said that creating and collecting private equity data was an "extremely bespoke" operation and that, for managers advanced on the ESG path, it was "completely integrated with due diligence" and embedded into investment decisions.

Wilkinson said private equity firms were upskilling and embedding ESG questionnaires into their due diligence process.

"Suddenly everyone is saying we need to do sustainability and those companies that have been doing it for 20 years now have a strategic decision to make," she said. "Are they ready to go farther so as not to lose their differentiation? And what does that mean for their investment process and the different metrics and measures?"

She said that it was a "moment of flux" for companies well known for sustainability, as they will face more competition in future and find the years ahead more challenging.

"They need to be looking at impact and not just talking about high-level qualitative information. Regulation requires everyone to go more and more toward ESG, so it is important for those companies that are genuinely selling themselves as sustainable that they can report on the real impact they are making," she said.

The role of private equity data when conducting due diligence

Schoonbroodt said the distinction between ESG and sustainable investment was becoming clearer and that new competitors were entering the market.

"It's about how you define a positive measurable contribution," she said. "It's in the process of due diligence that we find the real problem around availability of data. That really is a tremendous change in terms of due diligence."

She said this could be a challenge for portfolio companies investing in 40 different industry sectors that needed to create and manage comparable data.

Ouamara said it was important to define what type of data is needed - and that may depend on the asset class.

"In real estate there is a completely different set of data from private equity," he said. "Education is key to working with portfolio companies and explaining the importance of reporting. There are lots of tools on the market, and some are better than others."

How can private market funds prepare for SFDR?

A highly significant regulatory change in the European Union (EU) is the introduction of the Sustainable Finance Disclosure Regulation (SFDR), which aims to increase transparency on sustainability.

All asset classes are covered, and the first part of the legislation requires investment managers and financial advisers to disclose information about ESG considerations and be classified by ESG principles.

Classification is categorised, with an "article 6" fund making no sustainability claims, while an "article 9" fund is dark green, with strong ESG credentials.

In addition, the EU taxonomy for sustainable activities came into effect in July 2020.

Wilkinson said many asset managers were redefining their funds and fine-tuning their definitions because of the legislation.

"This has meant some funds have gone from article 9 to article 8, and these funds have been open about it," she said.

The whole market needed to think about what real change and impact their investments were making, rather than "greenwashing". For example, there was a current trend to reduce interest on loans if companies achieve certain sustainable key performance indicators.

The danger here was that this might put "a green wash over it when not changing or moving anything," Wilkinson said. "Companies need to evolve and become more ambitious." Argenziano agreed that standards and frameworks were needed - and there was "plenty of work still to do".

Is your business ESG ready?

Learn how Intertrust Group can help you navigate the complexity of the new legislation and its implications.

How Intertrust Group can help

Private debt strategies and portfolios can require highly sophisticated models. As such, managers increasingly need support in areas such as reporting, customisation, IT and due diligence. Intertrust Group's tech-enabled, client-centric suite can provide a range of services to help you manage your portfolio data and analysis and provide outsourcing solutions.

Why Intertrust Group?

• Intertrust Group is a publicly listed company with more than 70 years' experience providing world-class trust and corporate services to clients around the world.
• Intertrust Group provides a wide range of financial and administrative services to clients operating and investing in the international business environment. We help companies to expand globally, offering support with restructuring, outsourcing and further developments.

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