n brief, could you explain what is meant by environmental, social and governance (ESG) considerations when it comes to private equity and investment? ESG considerations in private equity have come about quite recently because, as the opposite of listed companies, non-listed companies are less subject to non-financial disclosures. Thus, ESG concerns were mostly limited to socially responsible investments in which they are a core principle. However, ESG criteria have now become tools for enhanced returns in supporting more efficient governance and management practices and in reducing long-term risks. For some years now, ESG principles have been enshrined in binding regulations by EU and national lawmakers, which extends the reach of ESG criteria to all asset managers, financial advisers and investors. Still, ESG is not yet fully integrated in asset managers’ strategies. Stemming from this, how are “greenwashing” and emissions transparency becoming matters of concern for asset managers? Environmental matters are becoming a major concern for regulators, which is translated in stricter regulation. It means more transparency requirements regarding environmental impact for companies and more liability related to the subsidiaries’ behaviour. Since 10 March 2021 (SFDR regulation), financial companies and funds are required to disclose how externalities and potential negative impacts affect their investments and must show how the environmental risks are integrated in their decision process and how they are compatible with compensation policies. Member States in the EU are also extending the obligations of reporting and transparency. In France, a law from March 2017 (n°2017-399) requires companies with more than 5,000 employees in France or 10,000 worldwide to establish a “vigilance plan” that must identify environmental risks, including for subsidiaries abroad. CO2 emissions are also a concern for investors and companies because of the cost of such emissions for companies. The price of CO2 on the EU carbon market (ETS) went from €23 a ton in November 2020 to €98 in February 2022. This trend seems structural because even if it went down due to the increase of energy prices following the war in Ukraine, it is already back to more than €80 a ton in June 2022. Some companies are granted free carbon allowances to prevent gross competitive disadvantages with companies located outside the EU. But as soon as 2023, the EU will enforce a Carbon Border Adjustment Mechanism (CBAM) to tax imported carbon-intensive products, which could lead to the end of free carbon allowances in the EU. Therefore, ESG considerations – especially the environmental ones – are now a matter of credibility for funds and asset managers. What other potential legal risks have risen from investors’ growing focus on ESG? Governance and social issues have long been public relations obstacles ESGand PrivateEquity in 2022 The private equity and investment space has become increasingly conscious of ESG concerns over the past decade, with legislation introduced across the EU, the US and the wider world in an attempt to enforce greater transparency in disclosures. In this feature, Nathan Blatz discusses the current ESG and private equity landscape and what fund managers should be conscious of as we move through 2022. I The price of CO2 on the EU carbon market (ETS) went from €23 a ton in November 2020 to €98 in February 2022. EXPERT INSIGHT 58 WWW.LAWYER-MONTHLY.COM | JUL 2022
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