Last week the Financial Conduct Authority wrote to alternative asset managers warning (among other things) that private equity firms and hedge funds offering ESG products will be subject to scrutiny. The letter says “it is important that investors have confidence in the products they are being offered, and this has specific relevance for products labelled as being ESG focussed and with investment strategies benchmarked against ESG themes”.
This communication from the UK regulator follows high profile regulatory action against greenwashing in the public markets – both in Europe (where in May this year German Bank DWS was raided by armed police in connection with allegations of ESG mislabelling) and in the US (where BNY Mellon has been charged and Goldman Sachs is under investigation for similar practices). It sends a clear signal that the FCA intends to get out ahead of greenwashing in the alternative investment sector, a plague that many fear has become endemic in the public investment markets. Alternative asset management firms will need to ensure that “documentation of…[ESG] products are clear, not misleading and that firms’ actions match the stated claims.”
The FCA also takes the opportunity in the letter to remind alternative asset managers that climate-risk disclosures aligned with the Taskforce on Climate-related Financial Disclosures (TCFD) (currently mandatory for the very largest fund managers) will become mandatory for alternative investment fund managers with >5bn AUM by 2023. The FCA goes on to reiterate that in scope firms should be taking steps now to ensure they will be in a position to make these TCFD-aligned disclosures from 2023.
The expansion of the scope of TCFD-aligned climate risk reporting is just one example of how demand for more ESG-related data and disclosure is permeating the private markets. Another is the Data Convergence initiative, an industry led initiative to agree a standardized set of metrics and mechanisms to support more consistent and comparable disclosure of ESG data by Private Equity firms to their investors. As of July 2022, over 195 GPs and LPs have committed to the initiative, representing over $22T in AUM. Transparency on and about ESG is clearly at a tipping point in private capital markets and there are many more significant developments to come.
It is important that investors have confidence in the products they are being offered, and this has specific relevance for products labelled as being ESG focussed and with investment strategies benchmarked against ESG themes