How fund operators can spot ESG opportunities in private markets

Sweta Chattopadhyay, Head of Investments – Europe, Moonfare, explains the difference between ESG embraced correctly in a fund’s operations – and those that are just cashing in.

Fund Operator Editor POSTED ON 7/7/2022 11:05:54 AM

Sweta Chattopadhyay, Head of Investments – Europe, Moonfare.

The rapid expansion of ESG principles into investment – and the sustainable offshoots that are related to it – mean that some in the industry are being left behind in client communications – and that some are professing to follow ideals they don’t quite understand, says Sweta Chattopadhyay, Head of Investments – Europe, Moonfare.

At a recent Clear Path Analysis event, investing in private markets, Europe 2022, industry leaders from organisations including Phoenix Group, abrdn, and Railpen gave their thoughts on how the private markets investment sphere is changing and what those industry needs to know.

One factor that saw heated discussion and various ideas was the wider framing of ESG-investing in the market, especially its closely linked but not identical idea of impact investing, which is a smaller subset of sustainable investing, which features projects “made with the intention to generate positive, measurable social and environmental impact alongside a financial return.” Impact investing is designed to target a range of returns from below market to market rate, depending on investors' strategic goals.

Chattopadhyay said ESG and impact investing will require investors to be more fluid and move away from ‘box-ticking’ exercises", especially when it comes to showing their credentials to clients.

“When we see a sustainable investment fund, we ask two things: are you setting out to do something positive and are you tracking KPIS? If you are doing something purely for commercial reasons which has an ancillary benefit by happenstance, we do not view it as sustainable.”

The ways that investors will be able to discern between an opportunity that is truly impact-focused versus one that falls short, will also be key, she said, but also be one that fund operators don’t know how to do.

“Without calling yourself an impact fund, you can do a lot of really good things if you are utilising ESG as a value lever,” said Chattopadhyay. “When we see a sustainable investment fund, we ask two things: are you setting out to do something positive and are you tracking KPIs? If you are doing something purely for commercial reasons which has an ancillary benefit by happenstance, we do not view it as sustainable.”

She explained that they hold managers accountable for what they say they can do. “We do this from a regulatory and risk standpoint. When a manager says they are going to deliver 2x return, 25% IRR at 1% or 2% loss ratios, we go back and see what our underwriting case was and how the manager was performing 2-10 years down the road,” she says. “We apply the same level of diligence on their ESG metrics. Ultimately, it is a constant cycle of improvement, which includes a very open conversation with those managers.”

“This is an industry that will continue to grow. We have some real, existential issues that need solving, such as rising sea levels, changing weather patterns and increasing inequality, to name a few.”

On top of ESG, there is also impact investing, and what its future means for sustainable investing as well as how it can differ in fund operation management.

“This is an industry that will continue to grow. We have some real, existential issues that need solving, such as rising sea levels, changing weather patterns and increasing inequality, to name a few,” said Chattopadhyay and added that these present both challenges and opportunities to make returns. “There are many ways to increase the living standards for a large portion of economically underprivileged populations while at the same time making money.”

To learn more and read the interview in full, please click here.

 

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