Earlier this year, Invest Europe, the industry body representing private equity and venture capital across the continent, set out its plans for new environmental, social and governance (ESG) reporting standards.
Its intention is to develop and implement a coherent standard for private equity and venture capital firms reporting on ESG issues. The announced European Data Cooperative (EDC) will be a non-profit database widely supported by industry associations.
Victoria Gillespie, Head of ESG Services, explores what standardisation could mean for alternative fund professionals and the wider funds industry:
How significant is standardised reporting currently?
The current situation is challenging, with managers, investors and the fund servicing community all having to operate according to multiple guidelines and practices. Globally, there is an inconceivable number of these frameworks being followed, resulting in a considerable amount of subjectivity and significant issues when it comes to comparing funds.
A key issue is data availability, which can be worlds apart depending on which end of the fund spectrum you are looking at. There are real differences, for example, between publicly traded companies and private markets, making standardisation hugely problematic. This is one of the key problems that EDC has been tasked with addressing. The EDC will act as a single data entry point using the same methodology for all private equity and venture capital fund managers.
Is the creation of these new standards a welcome move for investors?
We have had some interesting conversations with investor groups about this, and it appears that many of them welcome standardisation, at least in the broad sense. The ability to compare like for like and greater transparency around ESG disclosure is seen as a good thing.
However, it is important to be mindful that standardisation does have a number of pitfalls. Different investors do not always look for the same thing – what one investor requires, another may not. As a result, being able to pin down common requirements may prove difficult.
Is it likely these moves will impose significant changes in the way fund managers and service providers manage their reporting?
To what extent standardisation will bring about significant change really depends on the systems and processes a fund manager or service provider already has in place to manage any ESG reporting.
Over the past 15 years we have seen a considerable increase in regulatory reporting. While some changes have arguably been smoother than others, each time the industry has been asked to address a new regulatory initiative, it has seemed to successfully manage the new reporting obligations and transitions.
With that in mind, there is no reason to believe shifts in ESG reporting will not be successful. In fact, it is generally acknowledged that standardisation can play a big part in promoting the transparency agenda, which underpins ESG reporting.
We will likely see some variation in the impact these moves will have, as we have in the past. Where investors can find comparable reporting, this presents opportunities for some companies and increases risks to others who may be behind the curve or acting within a sector that does not lend itself well to the common or more standard reporting requirements.
Overall, though, we hope the standardisation of any reporting leads ultimately to more meaningful, higher quality information being relayed to the market, rather than meaningless data sets sitting within reports, providing no value to the end user.
How likely is it we will see standardised reporting beyond Europe too?
Given the remit of the current International Sustainability Standards Board (ISSB) and global reach of the International Financial Reporting Standards (IFRS), we hope that standardisation will reach global implementation. There are already precedents for that, and many jurisdictions support the drive for standardisation. Ultimately, as an industry with a global investor market, it makes sense to be able to work and report within a globally understood set of parameters.
However, this is a rapidly evolving area with multiple stakeholders and interest groups, and so we can expect that sort of global roll out of standardised reporting to be complex. The hope is that collaboration and support is given from global market participants, resulting in sensible common reporting that aligns and supports global reporting goals.
To discuss the reporting or any of our ESG services, please get in touch with Victoria directly.