From our extensive engagement with the international PE market, compliance with ESG legislation, both voluntary and mandatory, is the key driver for adopting a more progressive ESG strategy.
Key compliance framework changes
2021 will be a year of significant change in the requirements for PE houses to report ESG related information. The following key compliance frameworks have all announced that they will be requiring increasing scope and depth of reporting from PE firms:
- SFDR (EU Sustainable Finance Disclosure Regulation)
- TCFD (Task Force on Climate-related Financial Disclosures)
- UN PRI (United Nations supported Principles for Responsible Investment)
SFDR & TCFD
SFDR and TCFD reporting will become mandatory in 2021 with the expectation that the current proposed scope of reporting will subsequently increase year-on-year.
Our current focus with PE clients is predominately around planning and managing compliance with SFDR, given the extensive list of ESG related data that requires mandatory disclosure, compared to TCFD, which is more easily managed.
- SFDR will introduce new mandatory obligations and standards for all firms selling financial products within or into the European Union.
- The Regulations are complex, relate to multiple existing regulatory regimes and come into effect in phases—meaning constant monitoring and adaptation to ensure compliance.
- Governmental and regulatory pressure will demand that capital flows are directed towards sustainable finance and increased transparency. This means that investment firms and in particular PEs will be mandated to integrate and publicly disclose ESG factors on behalf of their AUM.
As a PE, you will need to report against a set of pre-defined ESG related criteria, covering a diverse range of topics from GHG emissions, energy performance and waste, to human rights, diversity & inclusion and anti-corruption.
The UN PRI remains voluntary, however is worth noting that several PEs have been de-listed due to lack of progress or compliance.
The need for robust data
We strongly believe that a more defined and prescriptive approach to ESG and a focus on “real data” is the critical enabler in achieving market-leading compliance with legislation. More importantly, perhaps, it also allows PEs to support the global fight against climate change and social inequality.
We equally understand that this will place short term demands on many PE firms. The best way to address this is to get ahead of the curve and start to plan your data collection and reporting regime now, rather than wait until there is a limited window of opportunity.
The choice of ESG data/analytical software that addresses the need for real data to ensure you are and remain regulatory compliant is a key next step on your ESG journey. Please feel free to contact Turnkey team for more information on our suite of ESG software solutions for Private Equity at firstname.lastname@example.org.