Sustainable finance

Sustainable finance

In light of international landmark agreements, the EU has been gearing up efforts to deliver on its goal to transition to a low-carbon, more resource-efficient, sustainable economy. The financial sector has a critical role to play in this process and the EU wants to be at the forefront of efforts to build a financial system that supports sustainable growth.

To that end, the European Commission has developed a comprehensive Action Plan, including both legislative and non-legislative initiatives. Examples include new legislation on disclosures by fund managers and investors relating to sustainability risks and sustainable investments, and amendments to the AIFMD Delegated Acts to take better account of sustainability.

Over the coming five-year legislative term (2019-2024), sustainability is expected to remain a key priority for European institutions.

How does it affect private equity?

Given its business model focused on long-term and active ownership, private equity as an asset class is particularly well suited to integrating and managing environmental, social and governance (ESG) matters. As such, the industry can play a crucial role in helping the EU achieve its sustainability goals. However, regardless of the laudable aims of this ambitious EU work-stream, the outcome of measures may have a very broad (and sometimes disproportionate) impact, and affect a wide range of regulatory files of direct relevance for private equity managers and institutional investors.

One example is the ongoing taxonomy debate, which could determine whether or not an asset or investment qualifies as environmentally sustainable. The definition might become even more important if the decision is made at some future point to adjust the prudential capital requirements set out in EU law to incentivise institutional investors to invest sustainably. Such a move could have a major effect on private equity funds’ ability to raise capital from those investors.