SFDR: a Private Equity perspective
How can boards help PE funds make and keep ESG promises, ensure SFDR compliance, while guiding portfolio companies to be financially successful? Anne Canel Non Executive Director in Private Equity funds, and Vanessa Klein, risk manager at EQT, discussed.
Sustainability profiles go way beyond the norm of a decade ago, which just sought to exclude the worst breaches of good practice. “Now funds are expected to promote a positive ESG stance,” Anne said. She spoke of a five-year process to educate investment teams of the relevance of ESG as a leverage for business development.
Anne noted that smaller funds working with a handful of portfolio companies tend to find it easier to gather the requested info but struggle with costs of formalization, when this is more of a challenge for the larger operations to get the info to complete SFDR reporting. As well, care needs to be taken not to lose sight of the first expectation of shareholders : achieve financial performance even if they fully agreen with focus on ESG indicators.
Vanessa said that there are many challenges by integrating ESG considerations into day to day operations. For her, one of the biggest challenges with SFDR was having to anticipate the evolving regulatory environment, and taking far reaching decisions before the rules were finalised. “Another challenge is that we needed organisational upskilling, because most of us are financial experts and not sustainability experts,” Vanessa added.
EQT has an in-house sustainability team, “and because SFDR applies across so many different areas of our business we need sustainability experts everywhere: investment teams, the marketing team, the reporting team…” Then, of course, data collection processes are also a challenge.
Yet she remains positive. “It can be quite easy to be overwhelmed but we should remind ourselves that this is an opportunity for us as private equity players,” she said.
To fully embrace their mission, Anne suggested encouraging independent directors to visit the portfolio companies to gain deeper understanding and facilitate greater ESG analysis. “From a compliance point of view, choices of article eight or nine need to be justified, and directors need a clear view of the decisions taken,” she said.
Vanessa said her company was mindful of the need to provide boards with sustainability related data and insights, presented in a way to enable them taking informed decisions.