Regulatory context: sustainable financing agenda
Sustainable financing has been growing in importance. In recent years, a series of climate and energy related global initiatives, international and regional policies has been launched.
Over 2,300 signatories of UN Principles for Responsible Investment (PRI) holding collective managed assets in excess of USD 80 trillion have committed to include ESG issues in investment analyses and decision-making processes. Further, owing to UN support, such funds as CDPQ, CalPERS, PensionDenmark, Swiss Re or Allianz joined the alliance of net-zero asset owners having committed to transform their investment portfolios to become climate-neutral by 2050.
The climate policy framework is regulated in the European Union. Under the 2030 Climate Target Plan the European Commission assumed that by 2030 the CO2 emission level in the EU should drop by 50 to 55 percent compared to 1990. The zero-emission goal should be reached by 2050.
In January 2020 the European Commission adopted the investment plan for European Green Deal whose goal is to fund sustainable investments in Europe. The Commission pointed out the outstanding role of financial sector entities in the sustainable transformation of the economy. This involves new obligations to be accepted by these entities and the development of a new regulatory framework for non-obligatory activities. In March 2018, the European Commission adopted the action plan on financing sustainable growth. It assumes establishing a clear and detailed EU taxonomy, which is a classification system for sustainable activities, introducing clear guidance for investors regarding the inclusion of ESG risks in decision-making processes, as well as developing a new category of sustainability benchmarks for investors.
The Sustainable Finance Disclosure Regulation that came into force on 10 March 2021 is among the key EU regulations in this respect. Its provisions regard disclosures on sustainable development in financial services. The Regulation is aimed at obtaining greater transparency with respect to the analysis of sustainability risks inherent in business activities of financial market participants and financial advisers.
On 18 June 2020 the European Parliament and the Council adopted a regulation on the “green list” for sustainable economic initiatives, aka the Taxonomy Regulation, which provides a general framework to allow gradual development of a general classification system for environmentally sustainable economic activities.
The regulatory environment and stakeholders’ preferences affect the ESG approach adopted by private equity funds. In line with SFDR, investment portfolio managers will have to explain how their investment decisions affect ESG-related issues. By 30 June 2022 the funds will have to publish quantitative reports including 18 obligatory and 46 optional ESG ratios. The information is to be made public and displayed on corporate websites. Private equity fund managers will have to determine whether SFDR requirements apply to their current or future funds. Although the Regulation does not specify product related requirements applicable to the existing funds, they may be assumed to affect the current reporting. Although private equity funds have experience in the collection of financial data from their portfolio companies, the type and scope of ESG data needed to report compliance poses a new challenge.
