The challenges and best practices of ESG reporting

As ESG reporting becomes increasingly crucial for fund managers, this article explores the challenges and best practices in navigating this complex landscape. Drawing from Ocorian's research, we highlight the importance of robust ESG reporting for managing risks, enhancing investor appeal, and staying ahead of evolving regulations. The article also underscores the value of partnering with third-party service providers like Ocorian and Treety to streamline the ESG reporting process, ensuring accuracy, transparency, and compliance in a rapidly changing market.

Why is ESG reporting so important to funds?

ESG reporting is critical for funds, as it enables them to assess and manage risks associated with environmental, social and governance factors that can significantly impact financial performance. Funds report on ESG by working with third-party service providers, such as Ocorian, Bovill Newgate, and Treety, who can help businesses gather data easily and make their ESG journey simpler.

Treety helps to refine the data estimations gathered by businesses by helping to validate their incoming data and plug the gaps with ESG proxies – which are complemented with data from third parties – based on data collected from multiple potential sources. 
As investor demand for responsible investment options grows, funds that can prove that they incorporate ESG metrics and data are more attractive to sustainability-minded investors, such as Pension Funds, ultimately enhancing their reputation. It stands them above competitors and allows funds to make more informed investment decisions, therefore creating value for investors whilst still contributing to positive social and environmental outcomes.

What are the potential changes to reporting standards?

Four key changes anticipated in the next SFDR update are:

1. Stronger disclosure requirements: The update is expected to require more granular information on sustainability factors considered in investment decisions, portfolio characteristics related to sustainability objectives, and the impact of investments
2. Taxonomy alignment: The EU Taxonomy for sustainable activities is expected to play a more prominent role in SFDR classification. Products labelled “Article 8” (promoting environmental or social characteristics) or “Article 9” (sustainable investment objective) will likely need to demonstrate a stronger alignment with the taxonomy
3. Sustainability risks: The concept of “sustainability risks” is likely to receive more focus. Disclosures might need to elaborate on how these risks are integrated into investment processes and risk management frameworks
4. Principle Adverse Sustainability Impacts: More emphasis might be placed on disclosures regarding Principle Adverse Sustainability Impacts (how investments negatively affect environmental or social goals). Reporting on engagement activities with companies on these issues could also be required. 
    

Another potential change to reporting standards involves standardising sustainability reporting across all financial products. This would mean some level of ESG reporting would be mandatory for all asset managers, regardless of whether their products fall under Article 6, 8, or 9. 

The minimum disclosures for all products would cover sustainable risks, which would be considered applicable by default and must be reported, and justification for sustainability claims, which means that any sustainability claims made during marketing would require clear justification.

Other changes could include the Principal Adverse Impact (PAI) statements, following the SFDR consultations. If changes are adopted, there will be new reporting templates for entities required to report under SFDR. This means entities choosing to report PAIs would need to consider and report on a wider range of potential impacts.

We predict these amendments to include:

• Expanding the list of social impact indicators considered in PAI assessments
• Refining the way PAI disclosers are presented
• Introducing requirements to disclose greenhouse gas (GHG) emission reduction targets
• Strengthening disclosures on compliance with the ‘Do No Significant Harm’ (DNSH) principle 
• Revising the rules for reporting on Multi-Option Products (MOPs)

Hatim Baheranwala, Cofounder and CEO of Treety, Ocorian’s ESG reporting partner said: “The aim of the original Sustainable Finance Disclosure Regulation, implemented by the European Commission in 2021 was to provide Retail investors & Limited Partners such as pension funds clarity & transparency on the sustainability characteristics of investment funds marketed to them - thereby tackling greenwashing,

“The chosen approach was to define a set of expected disclosures and reports, and not undertake any formal labelling. This has unfortunately backfired during implementation, since the reporting categories such as Article 6, 8 & 9 have emerged as de facto labels. Additionally, the decision of allowing investment firms to establish their own definition for terms such as "sustainable investments" has led to even more confusion in the market, where differing firms have developed very diverse definitions for these terms.

“It is therefore a welcome sign that the EU is undertaking this review, and we expect the forthcoming amendments to the structure of the SFDR and its related technical standards to be announced soon. We are also urging asset managers to stay one step ahead and be prepared - while the regime is being improved and simplified, by entering into this review the EU has clearly signalled that its aim is to eliminate loopholes and ensure standardised sustainability reporting across the entire market.

"We recommend that all alternative asset managers start by reviewing their current ESG and sustainability reporting processes and ensure that they are taking steps to ensure completeness, credibility and efficiency in their reporting flows - just like they do for their financial disclosures.”

Why do I need a partner to find my winning go-to-market ESG approach?

Working with well-informed partners, such as Ocorian, Bovill Newgate, and Treety, can help businesses to gather data effectively and make their ESG journey more manageable.

Fundraiser Benjamin Lamping, Founder, CEO, Reframe Capital emphasises: “Increased regulation, ESG standards, investor requirements, [are] placing greater pressure on managing business models and margins and that's a significant factor behind the growing trend for managers to outsource certain non-core functions.” 

Earlier this year, Ocorian partnered with Treety, an ESG SaaS solution specialising in private markets, to provide ESG reporting, analytics and training for fund services clients. In this mix, Ocorian also offer customised dashboard and analytics, sustainability risk assessment mapping, SFDR annex and disclosure templates, and ESG/impact data collection and approval flows.

Treety helps to refine the data estimations gathered by businesses by helping to validate their incoming data and plug the gaps with ESG proxies – which are generated by a third party – based on data collected from multiple potential sources. Many businesses previously adopted a 'wait and watch' approach to adopting a formal reporting solution, but felt the pain of data gaps and trust of data first hand during their first reporting cycle. This has led to a better understanding by fund managers of what solutions are needed. 

Organisations need to be able to track their activities in order to monitor their ESG impact. Treety collects on a fund manager’s behalf, which removes the burden of data capture administration.

What level of reporting do you need to achieve?

Working with a partner such as Treety makes the level of reporting more manageable for fund managers. 

Susan Burkhardt, Partner, Clifford Chance underlines the importance of service providers: “The existence of certain service providers has made entry into Europe much more doable for your mid-market US or Canadian manager. So many of the reporting complexities make it much more intimidating going into Europe if you don't have that kind of help. So having the right partners is really key.” 

Hatim Baheranwala, Cofounder at Treety adds: “At the moment, there’s a ‘comply and explain’ position that means you can use proxy data – however there is scepticism in the impact space about proxy data.”

If the whole idea is transparency, then some of the calculations are highly complex and not obvious to investors; so people need tools – which Treety have – to create a scorecard and compare. This is better than throwing raw data around.

A rising number of professionals now appreciate the value of ESG and its impact, and seeing the correlation between it and the performance of funds is vital for them. 

About Ocorian Fund Services

Ocorian’s fund services team delivers operational excellence across fund administration, AIFM, depositary and accounting services to the world’s largest financial institutions along with dynamic start-up fund managers and boutique houses. It’s team of over 300 funds specialists work across all major asset classes of alternative investment funds such as private equity, real estate, infrastructure, debt, and venture capital, whilst its specialist Islamic Finance team is a leading provider of Sharia-compliant investment structures.

About Bovill Newgate, an Ocorian company 

Bovill Newgate is an Ocorian company and specialist financial services regulatory consultancy with a global offering across the UK, the Channel Islands, Singapore, Hong Kong, Mauritius, and the Americas. The firm helps its clients meet complex and evolving regulatory obligations, providing certainty and peace of mind. Its clients are firms of every size across the financial services sector. Bovill Newgate supports its clients in managing regulatory change and dealing with regulatory scrutiny. Providing advice on regulatory change and preventing financial crime, applications to regulators, building or enhancing regulatory frameworks, conducting compliance investigations or diagnostics, training and fulfilling prescribed roles Bovill Newgate have experts based across all the world’s key financial centres who operate globally, acting as one team.