How EU-based hedge funds and private equity managers can continue to lead the way in ESG implementation

On September 26th, RFA attended an event hosted by ALFI’s Hedge Funds and Liquid Alternatives community. At the event, it was discussed that Europe focused hedge funds are outperforming in local markets and are leading the way globally when it comes to the ESG implementation of funds. Europe is thus a global leader when it comes to the ESG market. However, in order to retain this position, a robust data management and reporting strategy is critical.

It is a similar story on the private equity front. On September 29th, Funds Europe shared an article stating that ‘private equity is dominating ESG as alternative investment managers focus on climate change’. The article went on to say that in a survey of 392 managers globally, Europe was leading the way in terms of ESG integration. Funds Europe reported that 84% of private equity managers assessed in the survey were deemed as excellent or good in terms of their approach to ESG, compared to 50% in the US and 70% in Asia.

Whilst Europe is considered to be leading the way, a Sustainable Finance Roadmap 2022-2024 issued by ESMA (European Securities and Markets Authority) outlined key challenges the continent faces when it comes to ESG policies, their integration and overall risks that firms face. Risks cited in the roadmap included monitoring, assessing and analysing ESG-related markets and risks and data quality issues.

According to ESMA’s roadmap, the key issue with regards to risk monitoring, assessing and analysing ESG-related markets is that the markets are evolving at a rapid pace. This is beneficial as it means the market can continue to evolve and adapt to create new opportunities for investors. However it also presents greater risks with regards to investor protection with regards to ESG products and debt instruments so they require close monitoring. However this is not always a simple task as risk monitoring and assessment is only as good as the availability and quality of data. Overcoming data quality issues is therefore a critical concern for ESMA and consequently firms participating in ESG markets.

In the roadmap, ESMA shared that problems concerning data availability stem from data gathering restrictions and there are currently a limited number of companies disclosing ESG related information. This is an issue that is impacting many sectors, however it is particularly challenging for asset managers because they are entities facing disclosure requirements in a short to mid term capacity. Within the alternative investment sector, there is a need to consolidate many sources of data that is often unstructured and does not follow a consistent rulebook of reporting standards. This in turn impacts the quality of data used for investments and the overall level of transparency with regards to ESG methodologies and data.

To counter this, in February 2022, ESMA announced that it is developing a single rule handbook to be used across the EU to protect investors and create greater transparency with regards to data and fight against greenwashing. Having a clear and robust strategy in place will in turn assist the ESMA with the developments of its single rulebook for ESG investments.

In order to retain its position as a leader when it comes to ESG implementation, asset managers operating in the hedge fund and private equity space need reliable and comparable ESG data to be able to comply with regulatory requirements whilst supporting their sustainable investment choices. In order to achieve this, having a sound ESG data management and governance strategy is critical. RFA works alongside clients to offer data management services. This includes data infrastructure, data warehouse, data governance and data analytics. RFA utilises leading cloud management tools and database performance monitors to provide real time monitoring for firms through our 24/7 Network Operations Center. Our tracking platform helps clients to constantly review their data and ensure accuracies when it comes to reporting and decision making.

As European firms continue to lead the way with regards to ESG investments, they also need a data management strategy that mirrors this progressive advancement, whilst also ensuring they remain compliant with regulatory standards. If you would like to talk about your firm’s data management strategy for ESG, contact us today.