The entry of ESG into the mainstream that you predicted a decade or so ago is now a reality. In eight years, where have you seen the most pronounced changes, particularly in private equity?
Nicolas Mottis: Was sustainable finance destined to remain a niche or join the mainstream? We guessed the latter, and that prediction has turned out to be correct across the entire financial market. To my mind, the most important change has been in participants’ attitudes and behavior. Investors no longer have the misgivings about SRI that they once did.
Candice Brenet: Since 2008, when we launched Ardian’s Sustainability program, the paradigm has shifted. We have seen a massive acceleration in the integration of sustainability issues in investment. Participants have come see the decisive role that incorporating ESG criteria can play in creating and protecting value.
ESG issues now make up 25% to 30% of the due diligence questionnaires sent out by our clients prior to fund selection.
Candice Brenet: Another pronounced shift is how management companies and businesses are organizing themselves around sustainability issues by setting up dedicated teams, putting specific governance arrangements in place, enhancing their reporting, and so on. This has been paralleled by a rise in sustainability-related regulatory constraints.
Nicolas Mottis: I would identify two tipping points in private equity. The first one is linked to growing ESG-related demands from asset owners. The second is connected to the fact that some players, such as Ardian, have created momentum and are now reaping the first tangible results after putting processes in place. However, much still remains to be done.
Progress needs to be made on many fronts by private equity senior executives and in terms of the technical recording of impacts.
From the EU’s SFDR to its taxonomy and more, what are your expectations for the step-up in European regulations? What challenges do these developments pose to affected companies, especially financial firms?
Nicolas Mottis: Most of all, I hope for simplicity from these standards. I fear that we are making the situation more complicated. How do we address the challenge of diversity? How do we curb the carbon impact? These are the key work areas. The regulations should also help participants by enabling them to devote more time to operational aspects than to reporting requirements.
Candice Brenet: Since some market participants are not transparent on ESG issues, the regulations play a valuable role in providing clarity. But I share the same concern. Too much complexity would be counter-productive. Another point to note is that the SFDR rules and taxonomy were designed to cover all asset classes. For now, the unlisted segment is not front of mind for regulators, who are not paying attention to the specific features of our business. The rules are generally based on a static approach and overlook somewhat the transformative role that unlisted investments can play. The fact that our investments have a long-run horizon is a game-changer.
By working to a long-term horizon, often with majority control of companies, private equity offers real potential for transformation. I believe that we could see very tangible achievements in the coming years.
Candice Brenet: Especially since private equity is unique in working with companies of all types. Smaller firms may command more limited resources than larger outfits, but they are also more flexible and have the agility needed to move the goalposts quickly. I think, for example, of an Italian firm that we helped to halve its CO2 emissions in the space of three years. The management team followed that up almost immediately by setting up an innovation unit that integrated climate and transition risks into product and services development.
Greenwashing remains one of the biggest risks. Is sustainable finance leading to real change today?
To some degree, greenwashing is the price of success. Some firms that are basically pretty passive in this area have seized on ESG as a business opportunity.
Nicolas Mottis: That being said, real progress is being made across all asset classes. But the seeds that are sown today will not bear fruit for some years.
Candice Brenet: Practices really are being transformed, particularly in Ardian’s Secondaries & Primaries portfolio. A full 200 GPs responded to our questionnaire this year. Of these, 95% have established a responsible investment policy, while 44% employ a full-time sustainability officer – that’s a 30-point increase on 2016. In some cases the results are not quite there yet, but these numbers are undisputable. Spurred in particular by new regulations, demand among our clients for sustainable products is accelerating quickly. Investors are paying attention to whether products are classified under Articles 6, 8 or 9 of the SFDR. They are starting to look at percentages of alignment with the taxonomy. We’re seeing it day-to-day: these drivers are having a very noticeable impact.
Which drivers need to be activated in the coming years if sustainable finance is going to take a decisive new step forwards?
Nicolas Mottis: Training is critical. The expectations are there, they simply need to be acted on. Putting support and training in place, establishing best practices and forging ties to research are vital in this regard. People aged over 40 especially need training. I have seen how training for executives can lead to change.
The second key driver is regulation. If designed intelligently, it should promote transparency and information sharing.
Candice Brenet: Overall, investment is the key issue. Participants need to agree to devote time, money, intelligence and energy to ESG issues. We need to be wary over over-complicating things, while not imagining that transformation is easy. Investment is vital to shaping a consensus around relevant, comparable and understandable metrics. And I would add that sustainable finance, alongside financing for the green transition, also has an important role to play in addressing social challenges, particularly those of ensuring equal opportunity and sharing value.
Finance is a tool. Its purpose is to serve people and the economy.