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Travers Smith's Sustainability Insights: The last chance saloon

Travers Smith's Sustainability Insights: The last chance saloon

Overview

A regular briefing for the alternative asset management industry. 

Last week, we hosted a seminar looking at the likely impact of the EU's sustainability reforms on private markets – and the message delivered by our keynote speaker was clear: we are in the last chance saloon.  The PRI's Nathan Fabian, Chairperson of the European Platform on Sustainable Finance, told our audience that the EU's current reform agenda is "market-friendly".  But, he warned, if the market does not play its part, the next version may not be.

The EU's Green Deal is at the core of the EU's plan for achieving its 2030 Climate Target Plan and setting Europe on a path to Net Zero by 2050 – and it is ambitious. The European Commission has made clear that it expects financial markets to play a key role in providing up to €350bn to finance the transition.  But time is short and Fabian argued that good intentions are no longer enough.  The finance community, including private markets, must now take concrete actions.

The EU's Taxonomy, a UK-version of which is also planned, will be vital to channel funding towards solving the planet's environmental problems – extending beyond the climate emergency and including biodiversity, water conservation, pollution and the circular economy.  In future, the intention is that all economic activities will have a binary categorisation: they will either contribute to clear environmental objectives, or they will not.  Asset managers will not be forced to invest in assets that are in the first category – at least, not yet – but they are likely to have to report how much of their portfolio is invested in "good" assets.  Even though, initially, a typical portfolio may only show 5-15% taxonomy-alignment, as 2030 approaches there will be pressure for asset managers and asset owners to increase that proportion significantly.

...policy-makers will re-calibrate their interventions if real change is not forthcoming in the coming years...

Clearly, one issue is data availability.  Within the EU, large companies will have to disclose their own levels of taxonomy-alignment, making an asset manager's job easier – but for a private markets investor, especially one investing outside the EU, there will be a data gap.  Asset managers who have the power to require disclosure from their investee companies, particularly those investing in emerging markets, will need to start demanding the data they need to make a taxonomy assessment.  The data needed to categorise an activity correctly may be extensive, so the challenges here could be significant.

But environmental issues are not the only societal problems that policy-makers are concerned with.  For example, mandatory human rights due diligence for all EU-based companies is very much in the sights of European legislators and the PRI is focused on helping investors to play their part here too. Diversity and inclusion has been front-of-mind for many businesses (including here at Travers Smith) and many private capital firms have considerably more work to do in this area – for example, the BVCA's most recent Quarterly Review highlights some of the issues in private equity and venture capital and promises greater focus in future research.

In summary, the changing regulatory environment will certainly require many firms to constantly re-evaluate their approach to a range of sustainability issues. But our panellists agreed that the regulation should not drive the strategy: instead, alternative asset managers should build sustainability into their strategic planning and decision-making processes.  The best firms will get ahead of the regulation and take advantage of the opportunities – as many already are.  Indeed, as our panel pointed out, many alternative asset managers are very well-placed to make a difference, given their levels of influence and governance models.

In any case, one thing seems clear: there can be no escape.  As Fabian cautioned, policy-makers will re-calibrate their interventions if real change is not forthcoming in the coming years.

 

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TRAVERS SMITH'S ALTERNATIVE ASSET MANAGEMENT & SUSTAINABILITY INSIGHTS

A series of regular briefings for the alternative asset management industry.

TRAVERS SMITH'S ALTERNATIVE ASSET MANAGEMENT & SUSTAINABILITY INSIGHTS