Actionable ESG for PE

The ESG landscape is largely being developed in relation to the activities and interests of the largest companies, the largest institutional investors, and the largest PE firms and subsequently applied across entire markets. This creates a dynamic wherein what is being expected and requested of you and your portfolio companies is not necessarily fully-aligned with your own operations and interests. We are dedicated to helping bridge this gap.

Taylor Gray, Ph.D.

Taylor Gray, Ph.D.

With over 15 years of experience in ESG research and practice, I currently lead the Research & Analytics division at Motive, a top ESG advisory for private market investors and companies. As an Oxford-educated expert, I've held academic positions, published in notable journals, and participated in prestigious conferences. My passion for sustainability and ESG has driven me to assist companies ranging from start-ups to Fortune Global 500 firms in harnessing the power of ESG programs and data for positive change.

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New Labels to Avoid Greenwashing


The UK's Financial Conduct Authority (FCA) introduces new Sustainability Disclosure Requirements, bringing much-needed clarity to green investing. These requirements include four investment labels: Sustainability Focus, Improvers, Impact, and Mixed Goals, simplifying choices into two categories - prioritizing financial returns with a sustainability angle or investing with a sustainable priority. This development is particularly relevant for private equity firms and portfolio companies, offering a straightforward framework to differentiate between ESG integration and impact optimization, reducing the complexity in sustainable investing.
Earlier this week, the Financial Conduct Authority (FCA), which is the regulator for financial services firms and financial markets in the UK, released its new Sustainability Disclosure Requirements (SDR) for asset managers. This new requirement joins those in the EU and the USA, such as the SFDR and the enhanced SEC ‘Name Rule’, which seek to eliminate greenwashing risk. The new FCA rule requires that all communications by FCA-authorized firms about the environmental or social elements of products and services ensure that claims are “consistent with the sustainability profile of the product or service”.  In an attempt to help firms interpret the concept of ‘consistency’,a nd to assist consumers differentiate among the growing universe of sustainability-oriented financial products and services, the FCA has introduced four new labels for investment products, including:
  1. Sustainability Focus: Products that aim to invest in assets that are environmentally and socially sustainable.
  2. Sustainability Improvers: Products that invest in assets that have potential to improve environmental or social sustainability over time.
  3. Sustainability Impact: Products that invest in assets with an aim to achieve a predefined environmental or social sustainability objective.
  4. Sustainability Mixed Goals: Products that invest across varying environmental and social sustainability objectives aligned with other categories.
Label selection is not absolute as any labeled product should aim to have a minimum of 70% of assets aligned with the label’s objective. What I really like about this new rule is that it finally cuts through the smoke and mirrors circus bedraggling the ESG / Impact relationship. Looking at these four labels, it is clear all would apply to financial products which integrate ESG data into the asset allocation decision-making process, but only one of them–Sustainability Impact–promises to put “doing good” front and center.  These four labels really boil down to only two options: 1) A financial priority with an interest in sustainability or 2) A sustainable priority through financial channels. The Focus, Improvers, and Mixed Goals labels conform to the former while the Impact label conforms to the latter. Finally, products can integrate ESG as they see fit and not need to try to be everything to everybody all the time. Key Implications The new FCA rule concerning greenwashing is not critical to private equity firms and their portfolio companies. The real key beneficiaries of this rule are the retail investors who have trouble making sense of sustainability-claims of the various Green- and Impact-themed ETFs, mutual funds, and financial advisory services which have grown exponentially of late. Even so, this rule does lay some ground-work which private equity firms and portfolio companies can benefit from over time. The labels presented in this rule mark a clear delineation between investments which integrate ESG data in the decision-making process and investments which optimize for impact.  The delineation allows actors to engage in ESG without being required to engage in Impact. This is a significant step as the politicization of ESG in the USA is largely fuelled by a confounding of ESG with Impact. Now, the FCA labels can be pointed to when your financially-material ESG efforts are mis-characterized as “distracting do-goodery”…and thankfully, the FCA labels are much easier to make sense of then are the SFDR Articles.  

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Noteworthy: European Parliament Fails to Ratify CSDDD

The EU-Corporate Sustainability Due Diligence Directive (CSDDD), which aimed to enhance corporate sustainability reporting and accountability, failed to achieve the required majority in the European Parliament on February 28th. This unexpected development marks a turning point in the EU’s regulatory push for sustainability disclosure, suggesting markets may have reached their limit after the CSRD and SFDR additions. Although the CSDDD’s ascension was expected, its failure provides a temporary reprieve for small and medium-sized companies facing increasing ESG data requests from larger corporations preparing for compliance. While portfolio companies can pause further expansions of supply chain reporting for now, maintaining existing capabilities is prudent in case the CSDDD regains life. Investors can also reorient efforts toward ESG initiatives more aligned with value creation. However, the strong momentum behind the CSDDD signals that enhanced sustainability reporting will likely remain a regulatory frontier.

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The 2023 ESG Regulatory Landscape: A Year in Review

Reflecting on 2023, key ESG regulations significantly shaped the sustainability and reporting practices globally. From the ISSB’s inaugural standards to California’s pioneering approach in Scope 3 emissions reporting, the landscape saw meaningful evolution. Notably, the EU continued to lead with impactful disclosure regulations, influencing the global stage. As the year ends, understanding these changes is vital for investors and companies navigating the ESG terrain.

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California’s New Climate Disclosure Legislation: SB 253 & SB 261

California has ushered in a new era of climate disclosure with SB 253 and SB 261, going beyond the SEC’s draft guidelines. These laws mandate that many businesses in the state, both public and private, disclose their greenhouse gas emissions and climate-related financial risks. Specifically, they call for detailed Scope 1, 2, and eventually, Scope 3 emissions reporting and are rooted in established protocols like the Greenhouse Gas Protocol and TCFD. For PE firms, this could mean added reporting responsibilities for portfolio companies doing business in California. While larger firms might have direct reporting obligations, even smaller entities could feel the ripple effects, especially those in the supply chains of reporting entities.

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