Between regulators and industry-led initiatives, asset owners have a growing number of tools to help assess how their ESG goals for private market investments are being met.
European regulators have led the charge. The European Commission's Sustainable Finance Disclosure Regulation requires asset managers, financial advisers and other financial market participants to disclose how they address sustainability and ESG factors in their investment decisions.
While the SFDR applies to companies within Europe, it is expected to have a ripple effect on fund managers in the U.S., particularly those operating in Europe or with EU-based investors.
The next move could come in the U.S., where the Securities and Exchange Commission continues to focus on ESG investing and more transparency for investors to address potential greenwashing, through rules proposed May 25 for public markets that could also wind up influencing investors in private markets.
In the U.K., retirement plan trustees have new climate-related governance and reporting rules based on a framework developed by the Task Force on Climate-related Financial Disclosures.
The standards apply to defined benefit and defined contribution plans. Larger plans with assets of at least £5 billion ($6.3 billion) have been following them since October, and funds with £1 billion or more will start this October.
With the standards requiring pension funds to consider, assess and report on the financial risks of climate change within their portfolios, a commensurate boost in pension fund commitments to net-zero goals is also expected.
Regulation plays "a big part" in ESG investing, said Maximilian Kufer, London-based head of ESG in private markets at Invesco Ltd., with $1.82 trillion under management. "Regulation in a lot of ways really guides us in the right way. I tend to see a lot of convergence in what the regulations require. Disclosure is key," he said.
The SFDR and U.K. rules are making it easier for asset owners to tell managers what they want, said Edward Dixon, head of ESG for Aviva Investors' real assets program in London. Combined with asset owners' own net-zero commitments, "the power of what that will be able to deliver over the next five years will be transformative," Mr. Dixon said.
Other organizations like the International Sustainability Standards Board are also developing standards for a comprehensive global baseline of sustainability disclosure in financial markets.
In the U.K., a joint effort among the Pensions and Lifetime Savings Association, the Association of British Insurers and the Investment Association has developed a carbon emissions template to help pension funds meet their TCFD requirements.