Jensen Partners’ ESG Newsletter – 2022:The Year the Greenwashers Lose
|If 2021 was the year when virtually every asset manager in existence referred to themselves as an "ESG-focused" investor. In that case, 2022 will be the year the greenwashers start to lose ground to managers with truly robust ESG policies. |
For years, institutional investors have demanded more ESG transparency and accountability from managers, and, for years, managers have responded with increasingly bold claims about the sustainability of their portfolios. Without uniform reporting and disclosure standards or strict ESG regulations, it was often difficult to separate the wheat from the chaff.
Those times, however, are now over. The proliferation of new regulations and initiatives worldwide sends a clear sign that support for ESG has reached a critical mass. The days of saying whatever you want about ESG are ending and there is no going back. Just over the past year, a wave of new industry initiatives and financial regulations were introduced -- all aimed at standardizing ESG data and disclosures and bringing sustainability issues–from climate change and biodiversity loss to diversity, equity and inclusion (DEI)--to the forefront of investment decision-making.
- In March 2021, the Level One rules for the Sustainable Finance Disclosure Regulation (SFDR) went into effect, requiring all EU managers to disclose how they take sustainability issues into account and label their funds accordingly (e.g., Article 6, Article 8 or Article 9). An additional set of rules with even more stringent requirements are delayed until January 2023.
- In April 2021, the SEC issued its first-ever 'Risk Alert' on ESG investing, which included details on what the SEC views as acceptable behavior for fund managers and which practices are frowned upon. A few weeks earlier, the SEC announced the creation of a Climate and ESG Task Force responsible for identifying instances of "ESG wrongdoing."
- June 2021: The China Securities Regulatory Commission (CSRC) finalized disclosure rules to encourage listed companies to integrate environmental and social considerations (e.g., environmental protection, alleviating poverty) into annual and half-year reports.
- July 2021: The Bank of Japan launched its strategy on climate change that, among other things, encourages financial institutions to align their disclosures with TCFD recommendations. In a related move, Japan’s Financial Services Agency (FSA) will require large, listed companies to make climate-related disclosures by April 2022.
- August 2021: The Securities and Future Commission of Hong Kong (SFC) issued Consultation Conclusions on the Management and Disclosure of Climate-Related Risks by Fund Managers, which will require fund managers to integrated climate-related risks into their investment and reporting processes.
- In September 2021, a group of private equity GPs and their LPs launched the ESG Data Convergence Project to streamline ESG data collection and comparison within the private equity industry.
- In November 2021, the Institutional Limited Partners Association (ILPA) released its revised DDQ with new questions on ESG and DEI in response to growing LP demand for standardized metrics.
- Also, in November 2021, the IFRS Foundation, which oversees financial reporting standards for financial markets worldwide, announced the creation of the International Sustainability Standards Board (ISSB) to help harmonize different disclosure and reporting frameworks.
- Also in November 2021, the IFRS Foundation, which oversees financial reporting standards for financial markets around the world, announced the creation of the International Sustainability Standards Board (ISSB) to help harmonize different disclosure and reporting frameworks.
- In December 2021, the Financial Conduct Authority (FCA) in the UK released final rules and guidance for asset managers and asset owners, requiring them to make disclosures consistent with the framework popularized by the Task Force Climate-related Financial Disclosure (TCFD). Additional rules on the classification and labeling of investment products could be on the way in 2022.
The SEC is expected to join the party sometime in Q1 to publish proposed disclosure rules for climate change and human capital management. While these rules may only apply to public companies at first, it may only be a matter of time before the new disclosure regime filters down to the private markets. Indeed, regulators at both the SEC and FCA have publicly commented about the importance of the private markets and the need to establish road rules for ESG and sustainability.
This means that alternative investment firms now face pressure from all sides – regulators, investors, peers and even employees – to better articulate their commitment to sustainability and back up that commitment with a combination of policies, processes, funds/products and talent.
This pressure helps explain the growing number of firms and funds with an ESG, impact, or climate mandate. Preqin estimates that as much as $3.1 trillion of private capital AUM could have an ESG focus, with about a third of this capital raised since the beginning of 2020. A recent PitchBook analysis of 700 active impact investment funds found these funds had $73 billion in dry powder and $213 billion in outstanding investments, with significant chunks of capital flowing to sectors like renewable energy, healthcare, sustainable agriculture and financial services. These figures show why there is such a fierce battle for ESG talent at all levels of the organization, from portfolio managers and research analysts to compliance professionals and marketing/distribution professionals.
On the marketing front, we have tracked 60 ESG-specific marketing hires over the last eighteen months, with private equity and multi-asset firms driving the bulk of the hiring activity. An impressive 42 of these 60 hires (70%) identify as women, although there is still significant room for progress on the racial diversity front.
We have also heard anecdotally in conversations with many clients that there has been a recent surge in demand for marketers with ESG experience or expertise. These job openings can be notoriously difficult to fill because of what it can take to be successful in the role, including:
- Experience with different types of sustainable investment strategies, from screening and ESG integration all the way to impact investing
- Familiarity with different industry standards and reporting frameworks, such as the Operating Principles for Impact Management (Impact Principles), Principles for Responsible Investment (PRI), SDG Impact Standards and TCFD
- Knowledge of current and upcoming financial regulations in different jurisdictions, focusing on the EU, UK and US.
|It can be rare to find a single person with this skill set, which is why many large alts firms are approaching ESG recruitment intending to make multiple hires and build a team. Often, one high-profile ESG hire–such as Blackstone recently hiring Jean Rogers, founder and former CEO of the Sustainability Accounting Standards Board (SASB), as their new Global Head of ESG–can be the precursor to several more hires in the future. We expect a swell in hiring in 2022 as more firms launch or expand their ESG offerings. |
The ESG space is moving at hyper-speed, with more significant changes expected in the year ahead. The Jensen Partners will continue to track these changes and share our insights with readers in these newsletters. As always, we welcome any questions and look forward to partnering with clients on new searches and research projects.
Here is a selection of recent articles and research studies capturing the current state of the ESG space and which trends are poised to disrupt the alternative investment industry.