Environmental, social and governance (ESG) considerations have become a significant part of the investment landscape in Europe, as recent regulatory changes across the globe have put a greater focus on ESG. Is it a time for GPs to shift to structuring funds and investments to align with investor expectations on ESG? What should GPs consider from a legal, operational and capital-raising perspective?
SS&C’s recent webinar on ESG in fund structuring explains recent tax trends and provides LPs’ views on risk and opportunities from ESG investments. We heard from industry experts David Naughton (Partner, Head of Financial Services, LK Shields Solicitors, LLP), Philip Murphy (Tax Partner, KPMG) and William Bryant (Head of Advisory, NorthPeak Advisory).
Our panel looked at a typical structure of an ESG-oriented fund regulated by the Central Bank of Ireland—the Qualifying Investor Alternative Investment Fund—and explained requirements and services for GPs to consider when structuring a fund. GPs may leverage the flexibility of the structure when making sustainable investments, and at the same time, GPs should comply with the EU Sustainable Finance Disclosure Regulation (SFDR) and understand where a structure lies within SFDR.
The SFDR requires asset managers to provide disclosures based on how they classify their funds depending on their approach to sustainability:
Article 6: funds that take into account sustainability risks (where funds make no consideration of sustainability risks this must be explained).
Article 8: funds promoting environmental or social characteristics, along with good governance; but not obliged to have a sustainable investment objective.
Article 9: funds with a sustainable investment objective.
From a tax perspective, US investors do not express a great appetite for regulated structures or onshore jurisdictions. This contrasts with Europe, where we observe a move towards onshore domiciles, regulated fund vehicles and managers.
Investors in Europe are interested in seeing which tax considerations GPs considered when structuring a fund. Environmental factors are more tangible and easier to assess, but when it comes to social and governance factors, investors seek more details on fund structure, tax strategies and actual investments.
Exclusion and integration represent another crucial aspect considered by investors. Managers should carefully assess how to best manage exclusions, which might be a complex process—especially in fund structures, where investors may expect different sectors to be excluded. For integration, investors expect appropriate governance and management, structured processes and procedures in place. Investors engage with the management and review reporting, policies and underlying data. They would consider ESG as an element of due diligence.
SS&C helps managers meet the demands of investors in many aspects, including ESG reporting, by collecting, managing and reporting ESG data for them.
SS&C’s end-to-end ESG reporting platform provides insight for managers and transparency for investors into the ESG profile of their portfolios. Through the ability to process third-party data, including from leading ESG data providers and institutional investors, SS&C offers investment managers a range of solutions that include ESG monitoring, reporting and regulatory compliance.