Several trends and developments have emerged recently in public and private markets for investors looking for opportunities through an ESG prism.

ESG Regulation

On the regulatory front, there has been significant movement in the past year after a long period of inactivity. The European Union’s Sustainable Finance Disclosure Regulation, or SFDR, went into effect in March 2021, imposing mandatory environmental, social, and governance disclosure obligations for asset managers and other financial markets participants. The SFDR was introduced along with the Taxonomy Regulation and Low Carbon Benchmarks Regulation as part of a package of legislative measures arising from the European Commission’s Action Plan on Sustainable Finance. The precise implementation of SFDR is still in flux; it probably will take a few years for the dust to settle.

ESG in the United States

In the U.S., the new head of the Securities and Exchange Commission has been clear about shining more light on ESG. The focus seems to be making sure that asset managers can substantiate their ESG claims. It’s not so much about whether a company offering an investment security is making truthful ESG claims, but rather whether they can offer a sound rationale and are supported by metrics.

ESG Standards

As far as standard-setting is concerned, there also has been considerable movement. Last June, the Sustainability Accounting Standards Board and the International Integrated Reporting Council merged to form the Value Reporting Foundation. The VRF’s CEO is now a Special Advisor to the Chair of the International Sustainability Standards Board, which was formed in November. These bodies, over time, should provide a clear, uniform framework for ESG reporting, which will clarify things for managers and investors.

The quest for a standard is being seen in private markets too. The Institutional Limited Partners Association (ILPA) selected a handful of ESG indicators for general partners to collect from their portfolio companies and report to limited partners. This is a big step in standardizing and simplifying ESG reporting in private companies. From my conversations with limited partners and GPs, everyone seemed interested in incorporating ESG principles in the most productive and efficient way possible. Some PE GPs integrate ESG into every part of the investment process. While ESG may not make or break a deal, it has become very useful in assessing value creation possibilities and now seems to be the umbrella for other elements — company culture and safety, for example — that have always been part of GPs’ value creation plans.

ESG in Public Markets

In public markets, we can see the strong impact of ESG interest from Europe. A recent survey of European investment managers found that ESG is expected to be part of about 80% of the exchange-traded funds launched in 2022. ESG is coming to be seen as a measure of good risk management, or at least a component of good risk management. In the U.S., interest is growing around diversity and inclusion, as well as climate risk management.

With fund flows leaning so heavily toward passive management, including in ESG investment products, it bears mentioning that much of the assessment and analysis in the area remains somewhat qualitative. For that reason, ESG integration probably represents an opportunity for active management to deliver value and better justify its fees.

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About Claire Veuthey

Claire Veuthey has worked in ESG investing for 15 years, serving in research, investment, product management, and business development roles in London, Toronto, Singapore, Amsterdam, and San Francisco. The founder and Principal of Rizoma Ventures, an independent consultant to asset owners and managers on ESG and impact investing, she previously served as Director of ESG and Impact at OpenInvest, a venture-backed public benefit corporation. Earlier, she headed ESG Research at Wells Fargo Private Bank and was Lead Analyst on the ESG research consulting team at MSCI ESG Research.

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This investment industry article was adapted from the GLG Roundtable “ESG Outlook and Trends 2022.” If you would like access to events like this or would like to speak with investment industry experts like Claire Veuthey or any of our approximately 1 million industry experts, please contact us.