Sustainability

The release of the International Sustainability Standards Board (ISSB) standards in June 2023 has sparked discussion across corporations, financial institutions and investors. There are questions around how these new standards will overlap with others, what expectations from investors are, and when the standards will be mandated across global markets. This article aims to address how private equity firms can approach the adoption of the ISSB standards through a practical step-by-step approach.

Sustainability disclosure for financial institutions will only intensify

Growing pressure from regulators and expectations from investors to enhance sustainability disclosure continues to intensify, particularly for financial institutions. Just in the past year, we have seen the requirement for more stringent disclosures from the EU’s Sustainable Finance Disclosure Regulation (SFDR) and more recently, the release of the ISSB Standards.

Approximately one-third of Limited Partners (LPs) in Asia Pacific have cited environmental, social and governance (ESG) factors as significant determinants in their decisions to reject investment opportunities (Mayer Brown, 2023¹). Furthermore, a recent survey underscores the financial significance of ESG, revealing that investors are willing to pay a 10% premium to acquire a company with a positive track record on ESG issues (McKinsey, 2020²).

Given the growing significance of ESG integration on fundraising and value creation, how should PE firms utilize new global standards to improve their sustainability disclosures? This is where the International Sustainability Standards Board (ISSB) steps in with clear guidance to sustainability disclosure standards applicable across all industries and markets.

Since its release, there has been extensive support of the ISSB standards globally.  While progress differs by country, we see Singapore, Hong Kong, Japan and Australia moving quickly signaling adoption and implementation in the foreseeable future.

Disclosures specific to asset management

In June 2023, ISSB released two new standards for sustainability-related financial information: IFRS (International Financial Reporting Standards) S1 and IFRS S2, where the development of the two standards borrows from the Sustainability Accounting Standards Board (SASB), the Task Force for Climate-Related Financial Disclosures (TCFD) and the Climate Disclosure Standards Board (CDSB).

The structure of IFRS S1 and S2 mirrors that of TCFD, with the same four key pillars (Governance, Strategy, Risk Management and Metrics and Targets) and requirements within each pillar. Guided by SASB standards relevant to asset managers, private equity firms may need to consider the applicability of ESG disclosure metrics around transparency to customers, employee diversity and inclusion, integration of ESG in investment management, business ethics and Scope 1, 2 and 3 emissions (including financed emissions).

For the private equity (PE) sector, the category of financed emissions proves to be the toughest in terms of data availability and quality for disclosure, mainly due to limited technical and financial capacity of portfolio companies.

How can private equity firms align their ESG disclosures with ISSB standards?

For private equity firms starting their sustainability journeys, it makes sense to align ESG disclosures with the ISSB standards at the General Partner (GP) level first, and then dive deeper with portfolio engagement.

The approach suggests firms develop their sustainability strategy based on the four pillars of ISSB. Private equity firms may look to establish foundational initiatives that facilitate the development of their ESG disclosures. Once the foundation is set, firms can advance into launching more forward-looking initiatives to address the wider scope of ISSB requirements. The table below demonstrates examples of initiatives that private equity firms may look to adopt.

Private equity firms that truly aim to integrate ESG into their investment and risk management processes must have consistent and frequent engagement with their portfolio companies. When prioritizing portfolio companies to engage, factors to consider may include:

• Technical knowledge of sustainability topics
• Availability of internal resources and capabilities, especially around data collection
• Regulatory landscape and requirements
• Industry-specific regulations, risks and opportunities
• Investors’ ESG expectations
• Holding period of portfolio company and exit strategy

Commencing the journey to develop your sustainability disclosures may seem daunting, but it is vital for the long-term growth of any organization. For private equity firms, transparency on what you can disclose and a vision for how you plan to improve disclosure is key – from the GP level through to portfolio engagement. How will you navigate this complex journey?

Schneider Electric’s Sustainability Business works with private equity firms across the globe, leveraging on the company’s expertise in decarbonization and energy management. Through the Private Equity Practice, Schneider Electric provides bespoke programs suited for the entire investment process – from fundraising, acquisition, holding and divestment. To find out more, please contact Michal Kwiatkowski .

List of authors -

Diana Chen, Associate Principal

Sofia Tyebally, Manager

Gerald Lim, Schneider Graduate Program Associate

Jeremy Chung, Sustainability Analyst – SCLP

References:

1. Mayer Brown. (2023). Sustainable Private Equity in Asia: Through the Lenses of Compliance, Strategy and Branding. Retrieved from https://www.mayerbrown.com/en/perspectives-events/publications/2023/04/sustainable-private-equity-in-asia-through-the-lenses-of-compliance-strategy-and-branding 
2. McKinsey. (2020). The ESG premium: New perspectives on value and performance. Retrieved from https://www.mckinsey.com/capabilities/sustainability/our-insights/the-esg-premium-new-perspectives-on-value-and-performance