Sustainable Finance: How ESG is Shaping the Future of Investment

Despite a cooling in ESG fundraising to $91 billion globally in 2023, there has been a notable resurgence in 2024, with $55 billion raised by April alone[1]. This rebound highlights the sustained interest and commitment to ESG principles among investors and fund managers. And, according to PwC, analysts expect ESG AUM to reach c20% of Global AUM or $33.9trn by 2026 ($18.4trn 2021).

Interestingly, while the performance difference between ESG funds (13.5% IRR) and non-ESG funds (15% IRR) is not significant, ESG funds tend to exhibit lower variance. This lower risk profile can be appealing to investors seeking stability. Moreover, six out of ten investors have either rejected an attractive investment opportunity or would do so based on ESG concerns, underscoring the growing importance of these factors in investment decisions[2].

Ross Youngs, Chief Commercial Officer at Belasko, identifies how ESG is shaping the future of investment, the impact on our clients and the business’ proactive approach to lead the way.

How are our clients impacted?

Our fund clients experience varying degrees of impact from ESG, largely influenced by their size and marketing strategies. Many clients share our proactive stance and have generally adopted two distinct approaches based on the level of regulation required:

• The Sustainable Finance Disclosure Regulation (SFDR): A key regulatory framework in the EU that governs the transparency and reporting of sustainability-related information by financial market participants.
• The Principles for Responsible Investing (PRI): Where SFDR has not been relevant, our clients have chosen voluntary compliance with the PRI which provides a set of ESG principles designed to foster a positive, sustainable impact within the global financial system.

Unpacking the SFDR

There are three levels of regulation applicable to funds marketed in Europe under the SFDR:

• Article 9: These funds are dedicated to achieving specific sustainable objectives. They have strict requirements on how they achieve their goals. There has been a great deal of focus on this category of fund with rigorous evidential reporting. Due to these high standards, about 40% of Article 9 funds, representing $175 billion, have reclassified to Article 8.
• Article 8: These funds promote positive environmental, social, and governance characteristics without necessarily having them as their primary objectives.
• Article 6: This category includes funds that do not integrate sustainability considerations into their investment strategies.

These three levels of regulation serve as stepping stones depending on where the business or fund is on its ESG journey.

How has ESG impacted Belasko?

At Belasko, we recognise the significant benefits of incorporating ESG into our business strategy. Although we’re not legally required to report on sustainability, we’ve taken a proactive approach in doing so by partnering with Terra Instinct to develop a Responsible Business Policy. This initiative includes forming a group-wide committee, defining relevant sustainable metrics relevant to our business, setting targets, and publishing an annual report on our ESG journey for clients and investors.

We anticipate that mandatory ESG reporting will become a reality for businesses like ours in the coming years. To stay ahead, we’re committed to being leaders in this space, continuously taking proactive steps to lead the way.

How can we help you?

No matter the complexity of compliance with the PRI or SFDR, there are common challenges that we can support you with.

• Defining a policy of responsible investment: The policy must consider the fund’s impact on ESG factors and establishing data points to measure and track positive impact according to the goals set.
• Data collection: While it may seem straightforward, data collection is not standardised across markets and countries so the sophistication and resource availability of portfolio companies to stream up the data sets can vary considerably.
• Regulation and investor demand: With both evolving rapidly, our clients often lack the internal ESG resources to stay compliant therefore relying on Belasko to keep them informed.

We have developed an end-to-end solution in partnership with Terra Instinct to power auditable data collection. Terra Instinct are specialists when it comes to defining policy and collecting and validating data, as well as providing reasonable industry estimates where data is not available. The expertise of advisory specialists is crucial in ensuring data quality, which, in turn, ensures accurate and reliable reporting for investors.

Moving forward

It’s evident that ESG is here to stay, with a growing market expectation for sustainability considerations in both our personal and business lives. Adopting positive-impact principles is essential for future success.

If you’re looking to prepare for the future of ESG, get in touch with Ross Youngs at [email protected].

[1] Preqin, “ESG in Alternatives 2024” [Source: https://www.preqin.com/insights/research/reports/esg-in-alternatives-2024?chapter=sample]

[2] Preqin, “ESG in Alternatives 2024” [Source: https://www.preqin.com/insights/research/reports/esg-in-alternatives-2024?chapter=sample]