How should your business integrate ESG into funds?

As ESG factors become increasingly integral to fund launches, fund managers face the challenge of balancing environmental, social, and governance priorities in their strategies. This article delves into Ocorian’s research findings, highlighting the importance of ESG integration, the evolving regulatory landscape, and the often-overlooked complexities of social and governance considerations. By exploring these dynamics, we uncover the opportunities and challenges fund managers encounter when navigating diverse investor expectations across global markets.

Are fund managers taking a balanced approach when designing their ESG strategy?

Many businesses publish ESG reports aligned with ESG reporting frameworks, standards, regulations, or investor expectations to demonstrate transparency, and disclose the environmental, social, and governance factors that contribute to the overall risks and opportunities involved with a business’ operations. 

There is, however, much less of a focus on the S and the G. For example, when a fund is established to build hospitals and schools it’s easy to integrate the social factor, but when considering broader-scope funds, it can be hard to measure those factors and see an obvious social good. 

The G is an overlay on the E and the S and is, in many ways, the most essential component of ESG, especially for financial services providers and funds. It’s all about how well a business runs itself, and commits itself to robust processes. The G naturally follows by wrapping up the E and S together. But, all in all, more energy and time have been spent on understanding the E.

“When we have any ESG discussion what we really talk about is the E, we spend a lot less time talking about the S and the G,” Jon D. Spencer, Managing Director, TriWest Capital Partners reflects during Ocorian’s round table. “And you know from my perspective, particularly the G component, the governance component of ESG, that's been table stakes for as long as I've been working, that hasn't changed. That's just good business practise that drives the right behaviour and I think is expected by any sophisticated investor.” 

Moreover, is the fund badged ESG or does the fund manager incorporate ESG credentials into their investment philosophy? These insights suggest that there’s opportunity where funds have yet to place their focus...

Finding opportunity in ESG – balancing global expectations

Finding opportunity in ESG requires navigating investor priorities. Some investors demand strong ESG considerations, while others avoid them altogether. This divergence can be daunting for North American managers entering the European market, where ESG expectations are central to fundraising efforts. 

Despite these challenges, there is significant opportunity, as shown by Ocorian’s survey indicating that 86% of European funds agree on the necessity of ESG elements for successful investment. Balancing these varying requirements is key to achieving both returns and ESG priorities.

Susan Burkhardt, Partner, Clifford Chance, emphasises this point: "Different investors have different requirements for ESG. Some really want you to think about ESG, some say you can't think about ESG. So, how do you balance those two competing requirements? When a US manager who's had that experience is looking at going into Europe, they get a little bit nervous about a third piece coming into the mix that is, again, going to be challenging for them. 

“They're going to be faced with all these EU pensions who want them to do ESG, but yet they've got to satisfy their US investors requirements who maybe don't want them to.

“We're definitely seeing American managers who are messaging without the ESG component. They're potentially downplaying it significantly. It's not that they're trying to hide anything, but it's clearly not what they're leading with. 

“Yet in Europe, it is front and centre and what's in articles 8 or 9 for an ESG-compliant fund. It's core to their fund raising. You can see that reflected in our survey report, where 86% agree that there needs to be an ESG element to successfully launch a European fund."

Benjamin Lamping, Founder, CEO, Reframe Capital comments: “Integration of sustainability into your investment process provides an added advantage or opportunity to gain access to the green capital that is available from Europe. If you have ambitions to raise capital, say in the Nordic markets where investors adopt a highly sophisticated view of sustainability, then demonstrating strong credentials and a data-driven approach within your investment process and reporting is key to attracting investors.” 

So how do you integrate ESG into funds?

Essentially, how you integrate ESG into funds is through reporting. By working with a third party, such as Ocorian, Bovill Newgate, and Treety, this can help businesses to gather data successfully and make their ESG journey easier. Increased regulation and requirements are creating pressure for fund managers, who then look to outsource.

Through Ocorian’s partnership with Treety, an ESG SaaS solution specialising in private markets to provide ESG reporting, analytics and training for fund services clients, businesses are now able to track their activities to monitor their ESG impact. 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. 

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.