Regulatory pressure with the phased implementation of SFDR and the EU Taxonomy have changed the dynamics in private markets and have left many private markets investors puzzling over how to warrant full implementation. This article takes a look at the most pressing challenges private markets participants are faced with and showcases one solution helping investors get prepared of what is to come.
What are the most critical challenges and why?
Although ESG and PE can generally be considered compatible, there are some challenges in integrating ESG into one’s own processes and systems. The main one centers around data – especially as relevant fund-specific and GP-specific ESG data is not as easily attainable as more traditional financial data. With an ever-increasing volume of ESG requests, ways must be found to simplify the exchange of templates and data while generating increased transparency. The challenges most frequently pointed out to us by private markets investor regarding ESG are:
Data collection & management
Data collection is one of the biggest challenges in private markets in general – this is no different for ESG data. Delivered from various sources, potentially in differing formats without the application of industry standards is an integral problem. There is a clear need for solutions enabling data to be entered into one system at the right times and in one common form. Many investors are struggling with disjointed communication between the various stakeholders and compiling the data captured into one common system. They therefore risk being able to attain a single source of truth.
Generating regulatory compliant outputs
With SFDR and EU Taxonomy regulations coming into effect, many investors are still looking into how to fulfil disclosure requirements. They now need to find a way to assess EU taxonomy eligibility followed by alignment, negative impact (SFDR PAI) and finally generate the content needed for regular reports and stakeholder requests. With regulations continuing to develop in the industry, investors are faced with either employing ESG-experts among their teams to produce the needed content and/or hiring external consultants to ensure that they stay compliant with changing regulations.
Making sense of ESG data – moving from the bare basics to real value creation
Solving the ESG data challenge is only part of the puzzle . The next step is not only to produce the required disclosures creating transparency for stakeholders, but to ensure being able to quantify the ESG performance. Moreover, finding ways to assess ESG risk & opportunity continuously across the portfolio. The objective should be for investors to do so in an automated way, building on and taking advantage of existing frameworks and standards.
How investors can overcome above challenges
In our opinion technology provides the key to all data-related hurdles. By using modern portal technology, the following tasks can be simplified:
- Collecting ESG data automatically via integrated workflows.
- Designing user-friendly input processes in the web portal
- Tracking ESG metrics and data centrally across the entire (aggregated) portfolio on one platform
- Creating integrated or stand-alone ESG reports
- Integration of existing frameworks and standards
- Continuously complying with regulatory requirements
- Enabling informed decision-making through portfolio look-through and other ESG analytics