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Research Reports » Trends in Fund Finance Report

Fund financing roundtable

Funds Europe – What impact have the EU taxonomy and the Sustainable Finance Disclosure Regulation (SFDR) had? And do you expect the UK’s Sustainability Disclosure Requirements (SDR) to align?
Jones
– I am beginning to see talk about taxonomy creeping into discussions, which has the potential to be helpful, assuming it’s adopted widely. The terms and phrases will crop up more frequently in finance documents and using a consistent set of terms to describe what you’re looking at will benefit everybody. To pick an example: ‘increasing diversity’. What does that mean [exactly]?

You must start getting quite specific to break that down into actual measurable components. That’s where the EU taxonomy will come in. As to the UK SDR, the UK will either adopt the EU taxonomy or just use the same words and phrases.

“There are still a high number of fund managers that have esg embedded in their investment strategy, but don’t have it [properly] embedded within the firm itself...”

Mehmood – While there’s standardisation, there’s also differentiation. It’s important with ESG-linked parameters that the manager can make sure that the KPI measures they put in place for fund financing dovetail with the specific ESG priorities of the manager/fund, hence not creating a secondary set of measures. What you don’t want is a standardised set of KPIs. Bronwen’s example of diversity is an interesting one.

For one manager, it might be about gender representation on boards, but for another it might be broader than gender. It might also include ethnicity and disability. The manager must be in a position to decide what the important parameters are and measure against that.

Morrison – It’s a frustration when I look at what on the surface appears to be well-structured ESG-linked fund finance, but when you look closely, the metrics that have been chosen aren’t exactly a stretch and are not material to the financial performance of that fund.

They’re easy to measure, but what does it mean for your investment activity? There is a danger that we could force too much standardisation and it becomes meaningless. It’s got to be very specific to the investment strategy of that fund, that manager and what they’re trying to achieve.

SFDRDavidson – One of the risks of SFDR is the way it can be interpreted as defining whether activities are either good or bad. Actually, the bulk of what we need to do is support existing companies and assets to transition. We need to see capital flowing to help what we might call ‘brown assets’ find their place in a sustainable economy and because of the nuance required for those conversations, we haven’t seen specific transition finance instruments developing at the same pace as green structures, but I expect we will as the market matures.

What we can’t do is create a bubble of bright green investment, without looking at the rest of the economy. If we find ourselves trying to boil down environmental issues to one single metric, we need to question ourselves, because that won’t get us to where we need to be.

Morrison – Fund finance has a potentially transformative role to play here. When I read trade press or commentary on the market, everyone talks about how difficult it is to put ESG-linked fund finance together because we can’t standardise things, or we might not have the data.

But they underestimated the impact of being able to engage strongly with a financial sponsor. They’re investing in potentially 20, 25 or 30 portfolio companies, so there’s a multiplier effect of strong ESG engagement at this level, which is much more powerful than engaging directly with one corporate, for example.

There is a huge responsibility here on financial sponsors, but if you take the time and put in the hard work at the start, it’s going to be transformative.