The rapid pace of change in the broader sustainable investment industry is undeniable. Silver has observed that an ESG policy or ESG process implemented more than a year ago may no longer be aligned with a firm’s ESG disclosures, industry best practices and market expectations. With new regulations on the horizon in the U.S. and mounting reporting pressures from industry organizations, fund managers must be diligent in their review of ESG practices and ESG communications.
To support your 2023 ESG program evaluation process, Silver encourages firms to consider each of the following:
- Review and update your ESG program – The SEC’s May 2022 proposals on fund labeling and ESG disclosures provided valuable insight into where fund managers should focus. Based on these proposals, fund managers should be able to answer “yes” to each of the following:
- Are ESG practices being applied in a consistent manner across the investment process?
- Do you have ESG-related disclosures in the appropriate places?
- Do your ESG practices reflect updated market tools? Do they match the asset classes you invest in?
- Is all external reporting and other commitments made by the firm’s ESG program being consistently executed and in line with SEC regulation (e.g., review of the firm’s Form ADV, Part 2A)?
- Is the language used to describe the Firm’s ESG program in compliance with the SEC’s updated marketing rules?
- Are all third-party services used to support the firm’s ESG program (e.g., ESG data, ESG proxy voting recommendations, ESG benchmarks) still rational and reasonable?
If you cannot say yes to each of these items, it is time to update your ESG program.
- Understand International ESG regulations and frameworks – Investor expectations and industry bodies are increasingly aligning with global trends. Fund managers need to be aware of their potential reporting obligations and pressures.
Does your firm receive inquiries related to:
- Reporting in-line with the EU’s Sustainable Finance Disclosure Regulation (SFDR) or the UK’s Sustainability Disclosure Requirements (SDRs)?
- Reporting to the Taskforce on Climate related Financial Disclosure (TCFD)?
- Reporting to the Taskforce on Nature-related Financial Disclosure (TNFD)?
- Aligning with the UN Guiding Principles on Business and Human Rights?
- Utilizing standards set forth by the International Sustainability Standards Board (ISSB)?
For fund managers who answer yes to any of the items above, Silver encourages you to:
- evaluate your regulatory reporting obligations to ensure you have not missed a deadline or update;
- ensure you respond consistently to requests for information; and
- evaluate the reporting standards and their relevance to your ESG practices and investment strategy prior to agreeing to utilize a new framework.
For additional details on international regulatory and standard setter developments, please see our 2022 year-end piece.
- Carefully evaluate ESG industry organizations and initiatives – One of the most prevalent methods fund managers use to showcase ESG maturity is to join an industry organization or initiative that is committed to advancing ESG practices.
Has your firm considered:
- Formally signing onto the Principles for Responsible Investment (PRI)?
- Reporting to the ESG Data Convergence Initiative (EDCI, formerly the ESG Data Convergence Project)?
- Joining an engagement-focused initiative (e.g., CDP, Climate Action 100+, CERES, etc.)?
- Partnering with ILPA’s Diversity in Action initiative?
Regardless of the organization (there are many!), it is vital a fund manager understands all reporting and disclosure requirements before pursuing a formal membership to ensure there is sufficient understanding and resources to manage an organization’s requirements and evolving standards. If you are already a member of an industry organization, Silver encourages you to review updated requirements for 2023.
- Report on your ESG efforts – Even if a manager is not a member of an industry organization, it is likely that an increasing number of investors will call for reporting on ESG metrics this year.
The process to begin reporting can include a manger’s effort to:
- Review or establishing the process to track and report on relevant ESG key performance indicators (KPIs) for each of its investments to demonstrate the firm’s focus on material ESG risks and opportunities; this process should align with the practices described in the manager’s ESG policy
- Based on increasing stakeholder interest and regulatory pressure, determine what climate-related activities may be relevant to undertake at the firm and fund level
- Determine existing pressure to report on specific ESG issues (e.g., biodiversity, nature, inequality), and consider incorporating some or all of the reporting framework put forth by ISSB, TCFD, TNFD, among others, as part of the manager’s ESG reporting efforts
- Fund Managers relying on qualitative reporting may face additional challenges in addressing evolving investor sophistication and standard setter trends related to ESG reporting. Identifying areas where quantitative KPIs can be incorporated will likely support a manger’s efforts in 2023.
- Pay Attention: Diversity, Equity, and Inclusion (DEI) surges ahead – Investor attention to DEI at the firm and fund level reached new heights in 2022 (Silver’s DEI roadmap covers this in greater detail). Just as investors expect their managers to report on ESG, there has been a parallel rise in reporting focused on DEI practices, and efforts to gather DEI metrics.
As a manager considers their DEI efforts, 2023 is the time to formalize the firm’s position:
- Establish a formal DEI statement or policy to formalize the firm’s efforts and areas of focus
- Similar to a fund manager’s ESG program, the firm should identify personnel to oversee and report on its DEI efforts
- Consider including a member of each of the firm’s functional areas when reviewing DEI practices on an annual basis to ensure these practices fully represent each team’s focus areas
Remember that the collection and reporting on DEI information must be voluntary, and in certain jurisdictions may be prohibited. Fund managers should use caution in over-promising on the delivery of data as the firm or fund level.
The actionability and accountability of a fund manager’s ESG practices and DEI disclosures are in the spotlight now more than ever before. Silver would love to support you and we look forward to your questions.