EU Private Markets: ESG Reboot

As the ESG wave approaches the shores of the EU’s Private Markets, GPs should make a strategic decision as to which role they would like to play in this new paradigm. The GPs that decide to embrace ESG values and emerge as leaders in the new landscape should consider viewing their entire operations through an ESG lens, spurring the transition towards a sustainable order of operations in all facets of their business – ranging from constructing a core ESG team to revamping their hiring and upskilling practices. 

In order to reap ESG’s full value creation potential, GPs should ensure that ESG and sustainability considerations are entrenched throughout their entire investment life cycle, from screening to exit. The effective implementation of a truly sustainable investment strategy, in turn, is largely dependent on the formalisation of a transparent and rigorous ESG investment policy, the prioritisation of material ESG issues and the proper identification and tracking of ESG-related KPIs. Long-term success will hang largely on adequate engagement with target companies, as well as the extent to which GPs succeed in transitioning these companies towards more sustainable standards and contributions.

Regulatory developments – most prominently in the form of the Sustainable Finance Disclosure Regulation (SFDR) – have been catalysing a veritable institutionalisation of ESG risk management processes, urging GPs to adapt accordingly. GPs are also becoming increasingly cognisant of the role of ESG risk management processes in avoiding reputational and financial losses within their own operations and those of their portfolio companies. In this context, GPs’ deeper engagement with underlying corporates puts them in a particularly privileged position to strengthen ESG risk management processes therein – subsequently boosting resilience and enhancing valuations. 

GPs should ensure that their ESG-related reporting practices are designed not only to meet regulators’ demands but also meet evolving – and increasingly stringent – LPs’ expectations. This urges for an ongoing engagement with LPs to ensure their reporting needs are being met; as well as the development of a flexible reporting policy that can promptly accommodate fast-changing and heterogeneous investor needs. Quality, transparent reporting is also instrumental in demonstrating GPs’ evolving commitment to ESG to the broader stakeholder base; which could prove particularly effective in strengthening the historically ‘tentative’ link between PM and ESG.

Effectively tackling ESG-related data challenges is the ‘sine qua non’ condition for all the aforementioned action points to effectively materialise. That being said, the historical lack of data standardisation within PM and its ‘secretive’ nature has rendered the effective handling of data a particularly burdensome task. We believe, however, that the regulatory rally towards enhanced transparency and standardisation will help GPs in tackling these shortcomings – ultimately alleviating part of the long-standing transparency concerns. Regulatory developments notwithstanding, the GPs most likely to thrive are those that are willing to leverage cutting-edge technologies to streamline their ESG data collection processes and rationalise the obtained data in meaningful, insightful ways.

ESG and sustainability requirements have grown exponentially more sophisticated in recent years – amid rising investor demand and increasingly stringent regulatory developments. In light of this ever-increasing complexity, the success of any and all ESG integration efforts – whether they be at the GP or portfolio level - hang largely on the exhaustive, consistent and effective management of ESG and sustainability related goals, criteria and targets/limits/exclusions. While these skills can be created and obtained through staff upskilling and a clearly articulated corporate structure, we strongly believe that it is absolutely critical that GPs strive to create a core ESG team.