Private funds expect incoming ESG regulations to boost sector – but UK will trail US and EU
Private investment firms in the UK think incoming ESG regulations will boost sector but funds worry divergence from global norms could harm progress.
According to research from PwC, 59.1 per cent of Limited Partners (LPs) and 58.0 per cent of General Partners (GPs) surveyed believed incoming regulations in the UK targeting ESG would have a “positive impact”.
“Investor demand for ESG investments is only expected to increase, and the regulatory changes in the UK will undoubtedly provide a boost to the industry,” the report said.
“In this new backdrop, managers that prioritise ESG considerations in their operations and product shelves will not only benefit from regulatory compliance but will truly stand out.”
The FCA is consulting on bringing in regulations on the Green Taxonomy and Sustainability Disclosure Requirements (SDR).
SDR rules aim to build “transparency and trust” by introducing labels to help consumers navigate the market of sustainable investment products while the Green Taxonomy is a tool to provide investors with clarity on which activities are labelled as green.
UK still lags behind US and EU
Despite the overall positive perception, the figures were lower than counterparts in the EU and US.
PwC said this suggests “there remains a need for the UK Government and FCA to hone the specific provisions…to the wants, needs and abilities of the country’s investment community.”
One of the main concerns for investors in the UK is that its proposed regulations deviate from the EU’s own rules, which can increase costs.
For example, the UK’s SDR rules include a greater number of categories than the EU’s equivalent regulation.
The research also revealed a divergence in how LPs and GPs are approaching the rules. In investment funds, LPs provide most of the capital while GPs are responsible for the day-to-day management of the fund.
63 per cent of LPs expect to become more demanding in terms of ESG reporting they expect from GPs. However, only 53 per cent of GPs expect these regulations to bolster their own reporting requirements.
If this is not addressed, PwC suggested that the more “ESG-agnostic” GPs may find their reporting practices are “not sufficient to meet the needs of the growing share of increasingly ESG-committed LPs.”
The report included findings from across the world which showed the rising tide of ESG in private markets. According to the data, over three quarters of LPs and GPs were planning to stop investing in or promoting non-ESG products by the end of 2025.
The research showed that 87.5 per cent of LPs globally are planning on increasing their ESG investment over the next two years.
Olivier Carré at PwC Luxembourg said: “LPs across the world have been increasingly focusing on ESG considerations across the different PM asset classes, while GPs who fail to adapt to changing investor demands risk losing business from the fast-increasing number of ESG-oriented investors.”