ESG regulatory developments have captured much of the attention of private fund managers, but there has been just as much activity in the world of standard-setters, field-builders and non-profits over the past year. To help managers navigate the ever-changing landscape of industry standards, frameworks and initiatives, Silver’s ESG team has prepared a summary of key market-shaping developments and their impact on our clients. 

This summary focuses on the following areas of the market:

• Sustainability Reporting, encompassing efforts by the International Sustainability Standards Boards (ISSB to standardize how companies report on key sustainability issues) 
• Key PRI Updates, encompassing a summary of the PRI’s most recent announcements related to changes to the 2024 reporting cycle and framework
• ESG Data Initiatives, encompassing how efforts like the ESG Data Convergence Initiative (EDCI) and the ESG Integrated Disclosure Project (ESG IDP) will influence what sustainability information private fund managers are expected to track and disclose
• Climate, encompassing the ways in which fund managers are investing in climate mitigation and adaptation, the U.S. Securities and Exchange Commission’s (SEC’s) recent adoption of the rule to enhance and standardize climate related disclosures, newly announced engagement initiatives and tools, and the criticisms that fund managers have faced for their climate commitments

Sustainability Reporting

International Sustainability Standards Board takes a big step towards a global disclosure framework

On June 26, ISSB issued its inaugural standards – IFRS S1 (for general sustainability reporting) and IFRS S2 (for climate-related reporting) – to help harmonize and guide sustainability disclosures. As a reminder, “ISSB builds on the work of market-led investor-focused reporting initiatives, including the Climate Disclosure Standards Board (CDSB), the Task Force for Climate-related Financial Disclosures (TCFD), the Value Reporting Foundation’s Integrated Reporting Framework and industry-based SASB Standards, as well as the World Economic Forum’s Stakeholder Capitalism Metrics.” Then on July 10, ISSB announced that it would be formally taking over management of the TCFD from the Financial Stability Board (FSB) starting in 2025

Closely following on July 25, the International Organization of Securities Commissions (IOSCO), the global cooperative of securities regulators, announced its endorsement of the ISSB Standards. IOSCO stated that, “the ISSB Standards are appropriate to serve as a global framework for capital markets to develop the use of sustainability-related financial information in both capital raising and trading and for the purpose of helping globally integrated financial markets accurately assess relevant sustainability risks and opportunities.” 

IOSCO went on to urge its 130 member jurisdictions, which collectively regulate more than 95% of the world’s financial markets, to consider ways in which they might adopt, apply or otherwise be informed by the ISSB Standards within the context of their jurisdictional arrangements, in a way that promotes consistent and comparable sustainability-related disclosures for investors.

Together, these milestones represent important steps toward establishing a global, standardized disclosure framework. Already, jurisdictions including Australia, Canada, Hong Kong, Japan, Malaysia, New Zealand, Nigeria, Singapore and the UK, among others, have expressed their intent to adopt the ISSB Standards into national law. (See here for a handy tracker of which jurisdictions have adopted the ISSB Standards.) 

ISSB has indicated that it will publish an adoption guide for policymakers that will include suggested “pathways” for implementing its standards. One jurisdiction likely to follow these pathways is California, which signaled a strong alignment with elements of the ISSB Standards in their recently passed climate rules. (See our summary on these rules here.)

There are three important questions that market participants will be expecting ISSB to answer as it ramps up its activity in 2024: (i) how it will ensure interoperability; (ii) what level of assurance will be required; and, (iii) how it will approach developing additional standards. The current state of each question is explored below.

Interoperability:

ISSB has repeatedly signaled its intentions that S1 and S2 be interoperable with other standards, in particular the European Sustainability Reporting Standards (ESRS) and the Global Reporting Initiative (GRI). ISSB and the European Commission have been working closely to ensure that companies using both ESRS and ISSB Standards will not face a double reporting burden. ISSB Vice Chair Sue Lloyd declared that the two sides have “managed to achieve a very high degree of alignment in our climate disclosures.” Further, the European Central Bank noted that, “the overlapping elements of the two standards display a high level of correspondence, and their alignment is sufficient to ensure that compliance with the ESRS guarantees compliance with the ISSB Standards.”

Meanwhile, the European Financial Reporting Advisory Group (EFRAG), the organization responsible for developing the ESRS, signed a joint statement with GRI in April 2023 confirming that they have achieved a high level of interoperability between their two standards. Existing GRI reporters are expected to be well prepared to report under the ESRS and entities reporting under ESRS are considered as reporting with reference to the GRI Standards. This cooperation will meaningfully avoid the burden of duplicative reporting. GRI’s CEO Eelco van der Enden shared that he wouldn’t be surprised if GRI ends up merging with ISSB, following in the footsteps of TCFD, SASB and IIRC. On November 9, GRI seemed to take a step in that direction with the launch of its Sustainability Innovation Lab (SIL) in coordination with the IFRS Foundation (which oversees ISSB). The SIL will bring together global and local partners to help companies advance their capabilities for reporting using the GRI Standards and ISSB Standards.

Assurance: 

Our eyes are on the International Auditing and Assurance Standards Board (IAASB), which on August 2 issued its proposed assurance standard, the International Standard on Sustainability Assurance (ISSA) 5000, General Requirements for Sustainability Assurance Engagements. 

ISSA 5000 is designed as a principles-based, overarching standard suitable for both limited and reasonable assurance engagements on sustainability information reported across any sustainability topic. Importantly, the IAASB drafted the standard to work with sustainability information prepared under any suitable reporting framework, including, but not limited to, those issued by the European Union (e.g., ESRS), ISSB, GRI, the International Organization for Standardization and others. Once approved, ISSA 5000 will be the most comprehensive sustainability assurance standard available to assurance practitioners.  

Assurance requirements are not explicitly part of ISSB’s remit; however, ISSB anticipates that as its standards are adopted into national regulatory and legal frameworks, regulators will require that information disclosed in accordance with these standards will be subject to some level of assurance.

Additional Standards: 

ISSB recently held a public consultation period to help the organization decide on its priorities for the next two years. ISSB is not expected to share these priorities until the first half of 2024, but there are some useful signals from the comment letters: 

• The International Association of Insurance Supervisors (IAIS), for instance, called on ISSB to continue its climate-first focus and ensure strong linkages between climate disclosures and financial reporting. 
• The UK’s Financial Conduct Authority, meanwhile, requested that ISSB make a “swift” start in developing a thematic standard on nature and biodiversity-related risks and opportunities.  The Taskforce on Social Factors, established following a consultation by the Department for Work and Pensions, recently announced it was coordinating with the ISSB on the reporting and disclosure of social issues for pension trustees.
• Still others asked ISSB to focus on developing disclosure standards for social issues, including the investor coalition led by ShareAction that wants ISSB to prioritize human capital and human rights for its next set of global reporting standards.

Silver’s Take: Market participants, including private fund managers, need to understand the direct and indirect impact of the on-going attention global regulatory agencies are paying to the ISSB Standards. For managers who utilize the TCFD framework or SASB metrics as part of their reporting efforts or portfolio management activities, we believe it is prudent to align these actions with the ISSB Standards in the near term.

Key PRI Updates

PRI revises its reporting framework, reporting timeline and approach to required reporting in 2024

In December, PRI Signatories were informed via a letter from Martin Skancke, outgoing Chair of PRI, that Transparency Reporting would be voluntary in 2024 for the majority of Signatories that reported in 2023. 

Following a series of communications related to the release of assessment reports, the PRI published a flurry of announcements on February 14, 2024, clarifying that: 

• Transparency Reporting will be mandatory in 2024 for the following: 
  • Signatories that reported in 2023, but did not meet the minimum requirements; and
  • Signatories that joined PRI in the last two years, but did not complete voluntary reporting in 2023, or only completed it privately.
• The 2024 Transparency Reporting Period will extend from May to July (exact dates to be announced); and
• Confirmation that the reporting framework will be substantially similar to 2023 and, noting that, “around 90% of questions are unchanged from [2023], with only 33 indicators updated or amended, largely to fix errors identified during the 2023 reporting cycle or to improve logic and clarity based on feedback from signatories.”

Silver’s Take: As we get closer to 2024 reporting, Silver’s PRI Signatory clients are asking various questions about the 2024 framework; the pool of Signatories who are likely to participate in 2024 reporting; and how to interpret the PRI’s instructions related to “private completion” of the 2023 reporting framework. We’ll address these and other questions during our upcoming webinar, titled “A Discussion with PRI,” on Wednesday, April 17. Silver’s ESG Team will be joined by the PRI to address questions, shed light on upcoming reporting and the many other areas PRI is focused on (e.g., enhanced focus on stewardship, recent announcement of “Spring” and many others).  Please join us!

ESG Data Initiatives 

Better data and more advanced tools reinforce the importance of ESG issues for private fund managers 

While ISSB is focused on corporate disclosures on sustainability issues, the ESG Data Convergence Initiative (EDCI) has emerged as a leading framework for private equity firms. EDCI was designed as an open partnership of private equity stakeholders committed to streamlining the fragmented approach managers were taking to collecting and reporting ESG data. Since its launch in late 2021, EDCI has grown to a membership of more than 375 private equity GPs (including several of Silver’s clients), LPs, Investment Consultants and Private Credit funds. 

The EDCI originally started with a set of six core metrics: GHG emissions, renewable energy, diversity, work-related accidents, net new hires and employee engagement. In September 2023, EDCI announced that it would add a Net Zero metric for 2024 based on input from across the EDCI community and in close consultation with the Institutional Investors Group on Climate Change (IIGCC) and Initiative Climat International (iCI). In February 2024, EDCI indicated it would open up membership to private credit firms in a move aimed at helping credit firms better set targets and monitor borrowers’ performance. GPs that are participants in EDCI are expected to report data on an annual basis as an input into EDCI’s ESG data platform. In a sign of things to come, EDCI’s second annual ESG in Private Equity Benchmark included more than 44,000 data points from nearly 185 GPs and 4,300 portfolio companies. 

In July 2023, the ESG Integrated Disclosure Project (ESG IDP), a global industry initiative launched in 2022 and designed to harmonize ESG disclosures in the private and broadly syndicated credit markets, announced several new milestones, including key updates to the ESG IDP Template. 

Joining the growing number of ESG data resources, in February 2024, MSCI announced that it launched the MSCI Private Company Data Connect as a “centralized hub that provides GPs access to private companies’ sustainability and climate data and disclosures,” using the ESG IDP Template as the basis for company disclosures.

And as firms begin to use automated platform solutions to gather and evaluate ESG data from their underlying investments, these platforms are also evolving. Notably, Novata recently announced the launch of a collection of ESG benchmarks to support users in further contextualizing their ESG data. 

Silver’s Take: Pressure to gather and report on ESG data will continue to grow in 2024. We view the push for increased transparency and accountability as a net positive for market participants, but it will take time for GPs and LPs to reach an appropriate balance around what sustainability issues are realistic to consider and report on. A note for managers who have not started to collect ESG-related data: start now; start with what is most material; and start with an accepted industry framework. 

Climate 

New tools and announcements signal greater momentum for climate finance, but challenges remain

Conversations related to managing, engaging on, and mitigating climate-related risks are center stage for private fund managers and LPs in 2024, with parallel conversations on improving positive climate impacts also demanding attention. Requests for reporting on climate metrics are included in nearly every due diligence questionnaire and regulations are increasingly requiring climate-related disclosures (e.g., ESRS Standards and those jurisdictions that have adopted the ISSB Standards). In light of these mounting pressures, it is necessary now more than ever to take the conversation on climate seriously.

Among the largest developments in recent climate news comes in the form of the COP28 agreement signaling the “beginning of the end” of the fossil fuel era. The landmark agreement was notable for being the first time that delegate nations committed to transitioning away from fossil fuels, although the speed and scope of that transition is still a subject of much debate. COP28 also provided a platform to launch ALTÉRRA, a fund that will seek to mobilize $250 billion globally by 2030, making it the largest-ever climate-focused private investment vehicle. Notably, over the past five years, several major players have also launched new fund products with a specific focus on climate-related investments, including, for example, Brookfield, BlackRock, Actis, Generation IM and Goldman Sachs Asset Management. 

For context, in 2021, the United Nations Framework Convention on Climate Change (UNFCCC) undertook an analysis that revealed ~$600 billion per year, or $5.8 trillion total, would need to be invested for climate from now through 2030 to meaningfully address climate change. Although ALTÉRRA and similar climate funds represent a massive catalyst – they must be exactly this, a catalyst – more investment is critical.

It is increasingly apparent that LPs and private fund managers have a big role to play in aligning investments with climate goals and the appetite to do so is already clear in the market. PwC’s 2023 analysis on the “State of Climate Tech” shows that $638 billion in climate tech investments were made by private equity and venture capital firms in 2023. This figure represents a 50% decline compared to 2022, which may have more to do with macroeconomic forces (e.g., inflationary pressure, geopolitical events, falling valuations, etc.) than it does with any lack of funding opportunities and it is a figure that bears watching in 2024.

For private fund managers that are being asked to consider climate-focused investments or demonstrate climate engagement by their LPs, the past year featured the release of new initiatives, tools and frameworks that can bolster and inform a manager’s approach to engaging on climate-related topics. A sample of these are included below:

• In March 2023, the IIGCC launched the Net Zero Engagement Initiative (NZEI). NZEI is made up of a group of investors focused on scaling and accelerating climate-related corporate engagement. The inaugural activity of the initiative included sending a series of investor letters to 107 companies, outlining expectations for credible net zero transition plans, including recommendations for comprehensive net zero commitments, aligned greenhouse gas emissions targets, emissions performance tracking and a credible decarbonization strategy.
• In May 2023, the IIGCC released a Net Zero Investment Framework Component for the Private Equity Industry, which “aims to provide a cohesive framework for target setting, engagement and reporting between LPs, GPs, and portfolio companies to support progress towards net zero at scale.”
• In November 2023, the Net Zero Asset Owner Alliance published a discussion paper that set out climate engagement principles, requests and practices that are applicable to all Alliance members’ asset managers, irrespective of their own climate commitments. 

Obstacles standing in the way of climate action

These developments, although positive, will likely face headwinds in the year ahead. Much has already been written about the politicized attacks on the net-zero groups, so we won’t restate those arguments here other than to say that both the Net Zero Asset Owner Alliance and the Net Zero Asset Managers initiative seem to have held onto most of their members. 

However, the same can’t be said for the Climate Action 100+ initiative, which in recent weeks has lost JPMorgan Asset Management and State Street Global Advisors, while BlackRock took a step back by transferring its membership to its international arm, BlackRock International. 

Market observers have pointed to the anti-ESG attacks in the U.S. and the June 2023 announcement by Climate Action 100+ of its second phase, which called on members to take stronger steps towards engaging with target companies, as the reason for the backwards move. Even Kirsten Spalding, Vice President of the Ceres Investor Network, which oversees the CA100+’s North American efforts, acknowledged the possibility of losing some signatories, saying: “We knew that the focus on making sure there was movement from certain companies was going to be uncomfortable for some investors.” 

Regardless, CA100+ will continue its efforts towards climate stewardship, as will the Glasgow Financial Alliance for Net Zero (GFANZ), a coalition of financial institutions committed to accelerating the transition to net-zero. GFANZ recently introduced an ‘observer’ category for non-members, likely in response to hand-wringing by current and prospective members who want to avoid additional scrutiny.     

The bigger question is whether policy developments will help drive or slow down climate-related commitments and reporting efforts. As the EU’s climate rules face delays, the SEC voted on March 6, 2024 to adopt its highly anticipated “Enhancement and Standardization of Climate-Related Disclosures” rule. The final rule, which applies to U.S. listed companies, removed the requirement to disclose Scope 3 emissions and significantly softened requirements for disclosing Scope 1 and 2 emissions, among other meaningful changes from the initial proposal. Challenges to the final rule have already been filed in court, and additional challenges are expected to arise.  

Silver’s Take: While the future climate disclosure landscape is unknown, the pressure to provide climate-related data from LPs is only expected to grow. Private fund managers should continue to expect their investors to push for climate-related disclosures and increased engagement on climate-related issues. For managers who have taken a wait and see approach to determining which climate risks are material risks across their portfolios, we repeat our guidance above: start now.   

Next Up:

We will be sharing an update on regulatory actions across the U.S., EU and UK in our next newsletter. We are excited to share our exploration of regulatory and standard-setting efforts aimed at other sustainability issues like biodiversity and inequality-related reporting. 

We hope you’ll join us on April 17 for our discussion with PRI. In the meantime, please contact a member of Silver’s ESG team at [email protected] with questions, feedback or comments about this article!