New regulatory requirements will push ESG even further up the capital market’s agenda

Increased focus on environmental and social issues due to the impact of Covid-19 , in combination with upcoming EU regulatory changes, have brought ESG to the mainstream in the Asset Based Security (ABS) market, shifting the way firms operate, the questions being asked of them and the relevant data measures that will be required. To discuss these shifts, we invited an expert panel to discuss these topics and more for our recent webinar on ESG and ABS.

Environmental and social issues are paramount in these times

There is no doubt that environmental and social issues have grown in profile on the world stage this year, and the opportunities and risks that such issues present for investments have never been more clear.

“Increasingly on the news, we are seeing not just environmental catastrophes but also societal unrest. It's becoming a more common feature of the world we live in,” described Andrew Pitts-Tucker, Managing Director of Apex ESG Ratings and a member of our expert panel.

His fellow panellist, Claude Brown, Partner at Reed Smith, agreed, “2020 was an inflexion point for ESG.” Once considered niche, ESG is now a central concern across the industry.

Incoming legislation will impact the ABS market

Over the coming months, the spotlight on ESG will continue to grow. EU SFDR regulation that comes into force in March 2021 “will be a pivotal event in the context of ESG” said webinar chair Paul Wilden, Global Head of Capital Markets at Apex Group.

“March 2021 is a very much talked about timeline in the private equity space, which thus far has been relatively detached from ESG reporting regulation,” agreed Pitts-Tucker. “It’s being viewed as a starting point and a game-changer.”

“We’re going to see a continent attempting to produce an ESG agenda,” added Brown. In terms of the impact on the ABS market, he said, “these new regulations and laws are going to see an increase in the universe of questions that are going to be asked by investors of their underlying assets and asked of the asset managers themselves.”

Three specific areas of regulatory impact

1. Sustainable Finance Disclosure Regulation

The biggest impact will come from Regulation (EU) 2019/2088 on Sustainability-Related Disclosures in the Financial Services Sector, which, Brown said, “is really going to alter the way that asset managers operate, what the questions are, what information they seek from the target assets.” That information, he said, “is going to trickle up through the asset base in an ABS deal, through the ABS structure itself, and into the investor community.”

2. Taxonomy regulation

No market will be untouched by new taxonomy regulation, which aims to align the entirety of the EU on the classification of various sustainable investments. Brown stressed that it’s “absolutely key to be able to talk the same language” and to tackle greenwashing and impact washing “by providing a common vocabulary”, ensuring that relevant terms are applied consistently.

3. Non-financial reporting directive

“The reporting of non-financial information has become more important,” Brown asserted. Though not directly targeted at financial market participants, the non-financial reporting directive “fully applies to companies of 500 employees or more, and also listed companies, credit institutions, banks, investment firms, broker-dealers and fund managers,” he continued.

Internal and external pressures to take an ESG-centric approach

It is not just this new legislation that is influencing firms to review their approach to ESG, but also demand from investors and the public, and a moral obligation to act responsibly, particularly in the wake of the Covid-19 pandemic.

“It's being driven by the moral sense of the people on the street, who are putting their money to work in pension funds, in insurance policies. The asset owners are starting to do what the public really wants,” described Pitts-Tucker.

He shared his sense that firms are ready and willing to make the necessary changes. “The one thing we have found incredibly refreshing is how the ESG conversations are going. There’s not a sense of fear or concern, or that these ESG metrics are a barrier. There’s actually a real sense of positivity.”

Finding and using the relevant data

Though firms are aware that these changes are due and necessary, not all are yet prepared to make them, in part because they have unanswered questions about how best to do so.

The key question, according to Brown, is “data; not only presenting your own data outwards to the rest of the world but also getting the right data coming in from your activities and the activities that you interact with, to make sure that there’s consistency.”

This leads to further fundamental questions, the two most commonly encountered by Pitts-Tucker being “what data, and how do we collect that data?” The problem, he said, is that “there are so many methodologies out there”, and “investment managers are being pulled in many different directions about what it is they should be collecting.” Rather than conforming to one standard, he suggests “we should be trying to consolidate the leading standards and put it all together.”

As such, there is a growing demand for a data collection and reporting tool that can take on this challenge, and help firms not only meet their regulatory obligations but go beyond them. “If you can collect data in an efficient and meaningful fashion and it’s stored in a place where you can do things with it, it’s much more actionable,” Pitts-Tucker concluded.

An intuitive platform for efficient data collection and reporting

Apex ESG Ratings combines consolidated, independent data collection, intuitive and user-friendly technology and intelligent analysis to deliver a tool that meets the needs of the ABS market. The platform offers ESG rating, reporting and benchmarking, along with company health checks and gap analysis.

Our ESG experts can help you to meet your regulatory obligations, see the opportunities of ESG and drive meaningful change for people and the planet.

Get in touch to find out more.