Sustainable investments challenges : the unlisted market’s answers

Is the quest for ESG strictly about marketing, or does it really have the potential to make a positive impact on the environment, business, fund performance, and the planet? 

One thing is certain, and we see it every day: the challenges of global warming are real, as heat waves, repeated floods, and other natural disasters grow in intensity and regularity. France averaged 1.7 days of heat wave per year before 1989, 8 days per year since 2000, and 9.4 days per year over the past decade¹. Between 1,000 and 2,000 communes in France reportedly did not find insurance for their climate risks as of January 1, 2024²!

Another certainty is that in recent years, subscriptions to sustainable funds have been significant (9% increase in 2022 compared to 2021)³ even though they have recently slowed down due to various factors such as opposition to environmental policies in the United States or in reaction to greenwashing among others⁴.

However, according to the recent SGSS survey conducted in May 2024, the vast majority of institutional investors remain committed to sustainability. For investors investing over long periods, it is still evident that ESG criteria are considered in the investment decision.

In addition to that, our survey also points out that 80% of management companies also offer Article 8 and Article 9 funds within the meaning of SFDR.

According to a study published by the consultancy KPMG, 71% of investors attach greater importance to ESG criteria in the context of a transaction and consider that the identification of risks and opportunities in this area, as well as their consideration in the valuation of the company, play an important role before the conclusion of the transaction⁵.

This is true for both their investments in listed funds and unlisted funds, even if for the latter the task is more complicated in the absence of easily accessible extra-financial data. Unlike listed companies, which can acquire data from market suppliers, data for unlisted companies will have to be collected directly at the source of the participations.

It is indeed important to know how to properly assess the costs of environmental and social risks and opportunities, and to establish a post-closing commitment plan for the transaction.

To do this, a certain number of due diligence (DD) are carried out during a transaction, on the financial, commercial, and operational aspects, but also now ESG which will be an integral part of the analysis list to allow to make an initial state of play.

Once the target company is acquired, it is important to implement the engagement plan and change practices to have a positive environmental and social impact. Indeed, weighing ESG risks and opportunities at the same level as the business and operational plan is a paradigm shift. It should be driven by the company’s management with a representative of the investment fund who will monitor and implement the strategy including ESG. For many managers, a company that considers sustainability risks and opportunities is one that will have more value and be better prepared for divestment at the end of the fund cycle.

To be credible and to put an end to greenwashing suspicions, these steps require measurable impacts. This need has been well understood by the legislator, who provides the actors with methodologies to assess the results of their actions.

One of these dimensions is the consideration of dual materiality, which consists in considering the impact organizations’ activites on their environment, and also the impact of environmental and social factors on their financial performance. It broadens the perspective from simple materiality that only takes into account the impact of the environment on financial performance. This dual materiality is defended by the European Union through various regulations such as the “Sustainable Finance Disclosure Regulation” (SFDR.) or the “Corporate Sustainability Reporting Directive” (CSRD) against the simple materiality advocated by the International Sustainability Standards Board (ISSB).

 This European framework being deployed plays a major role in supporting the ESG transition. Notably, the evolution of the Non Financial Reporting Directive (NFRD) towards CSRD which broadens the scope of companies eligible for ESG performance reporting. The text also covers small and medium-sized enterprises. However, the problem of data availability and quality remains unresolved, particularly for companies not affected by this new directive.

Therefore, the implementation of a commitment plan is key the support of asset managers companies in the collection and compliance of the ESG data necessary for due diligence,

The survey conducted by Societe Generale Securities Services shows that 62% of management companies use fintech services or consultants to launch their ESG range.

Societe Generale Securities Services has also contributed and developed a specific data collection, quality and reporting offer for non-listed managers, in partnership with fintech Greenscope, developed with Societe Generale‘s incubator.