An investor’s view of the ESG landscape
The second annual Real Deals and The Drawdown ESG: Explore, Strategise & Grow conference, hosted investors and advisers in London, and delivered a wide range of panel discussions, workshops, and roundtable sessions exploring the evolving impact of ESG in the investment market.
Sessions included impact versus ESG, outsourcing versus in-house ESG capabilities, regulation, disclosure and reporting, decarbonisation, ESG as a value creator, and the ever-challenging conversation of data, to name but a few.
Sustainable Finance Disclosure Regulation (SFDR)
With the next phase of SFDR Level 2 coming into effect 1st January 2023, conversations focused on the challenges of complying with disclosure requirements. The new mandatory reporting templates, and the Principle Adverse Impact (PAI) statement divided into 14 core indicators and 31 additional indicators, relating to both environmental and social impacts, are causing much discussion amongst those funds impacted.
ESG integration is not going to abate and will continue to be an essential component of investment decisions and a key part of the M&A process
Conversation from both panellists and attendees, suggested that although SFDR is still in its infancy, it is already influencing investment decisions. It was interesting to see that by assessing the impact of possible investments and capabilities to collect and report on ESG metrics it had already resulted in Fund Managers downgrading their active and passive Article 9 funds to Article 8. The consensus in the room was that there is a lack of consistent methodology being followed and comprehensive data is still the biggest challenge investors are facing.
The SFDR session led to interesting discussions, debating how this will affect transactions going forward and how quickly the market will respond. The one thing we can be sure of is the demand for a continuing focus on ESG integration is not going to abate and will continue to be an essential component of investment decisions and a key part of the M&A process. It is hoped that the upcoming UK version (SDR) will have realised and addressed some of the challenges seen in Europe.
Data
A reoccurring theme of any ESG related conference is data. In this case how to collect meaningful data, PE data requirements, what to do with imperfect data, estimation, and how to use performance based ESG data to report on metrics, were all topics of debate. It was particularly interesting to hear discussion around the role of social data, regulatory or not, and the challenges for PE GPs in collecting this from portfolio companies.
Fundamentally, regardless of the challenges, this data is pivotal in proving the value creation story on exit.
Talent
Sessions discussing the supply chain of ESG professionals to support the integration and reporting requirements within the industry was a reoccurring topic. Whether discussing ‘in-house versus outsourcing’, or the clarification required of different ESG roles, it’s evident that there is a supply issue of expertise available to fulfil the requirements of this evolving landscape. An interesting extension of this is the need to educate throughout wider teams ensuring that ESG integration into fund strategy is not purely the responsibility of the ESG team.
Collaboration
Jo Daley, Director and Head of Impact at Clearwater International commented:
“The key message, and at the heart of ESG, is that working collaboratively is the key to success. The scope of ESG, new regulations, impact on financial valuations and the fast-paced evolving nature of many aspects of this arena mean that forums like the Real Deals and Drawdown conference are essential to share knowledge and best practice, debate and learn.
ESG is complex but we cannot let perfection be the enemy of good. No one person knows everything so working together ensures better outcomes for all.”
