While ESG (environmental, social and governance) investing was one a niche strategy, it has become a dominant theme for investment managers across various industry segments. Growth of AUM over the past several years demonstrates this rising interest—AUM grew from $22.8T in 2016 to $35T in 2020 and to over $50T in early 2022.
In the private market space, several catalysts present areas of opportunity for investors. Amid rising interest rates and inflation, private credit transactions have become more attractive. As labor market challenges and the shift to remote work continues, demand increases for more housing and residential real estate investment opportunities. Growth in online shopping has fueled investment in commercial real estate projects like warehouses and logistics. And the increased focus on ESG and sustainable investing has spurred opportunities to invest in multi-family and affordable housing, as well as clean energy infrastructure and technologies.
Private market ESG investment opportunities include joint ventures, private credit loans or direct purchases, limited partnerships, and business development companies. These vehicles can be used to access alpha-generating projects like solar, renewable and green energy, carbon recapture, wind, and hydroelectric.
It’s important to note that ESG investing carries its own specific reporting requirements to meet both stakeholder and regulatory demands. Regulations vary by country and region, with a heavy focus on climate risk disclosures. In the US, the SEC has proposed regulations like enhanced and standardized disclosures for companies providing information about greenhouse gas emissions in their registration statements and annual reports, and strategy and metric disclosures by investment managers who promote funds or strategies that claim to be ESG-aligned. Meanwhile, in the EU, the Sustainable Finance Disclosure Regulation (SFDR) requires disclosures to avoid greenwashing, and the Non-Financial Reporting Directive (NFRD) expands the scope of mandatory sustainability disclosures.
Complying with regulations can be a challenge without a clear strategy for scoring ESG investments. Many vendors provide ESG scoring, rating and reporting services to help managers meet transparency disclosures. An ESG reporting solution can help you rate whether an investment fits your ESG goals, as well as enable you to provide more transparency about those decisions when you report to investors.
A sound ESG strategy requires a robust policy that touches all areas of a business, including operations. To create your policy, lay out your internal ESG philosophy and values, then detail how ESG will factor into the investment process. Determine what metrics you can capture at what frequency, as well as how they will be communicated to stakeholders. Then decide who will be responsible for maintaining the policy and meeting regulatory guidelines.
To learn more about how SS&C can help provide risk management, reporting and scoring around your ESG and sustainable investment strategies, please contact us.
Written by Scott Kurland