Transparency in action: Sustainable growth in private markets
As the private capital landscape continues to evolve, transparency is becoming a vital component in driving sustainable investments. At SuperReturn CFO/COO, Ashim Paun, Triton Partners, will explore how the surge in sustainability regulations—despite adding administrative burdens—equips investors with critical data to combat greenwashing and align with genuine sustainable outcomes. Ashim sets out some initial thoughts on these topics in this article, with new policies like the EU Green Deal and TCFD disclosures gaining traction, private markets are at a pivotal moment to leverage capital for both financial growth and environmental impact.
Transparency is key to proving the role that capital markets play in driving sustainable development and helping investors support more sustainable outcomes. While the high pace of regulatory change in sustainable finance creates an administrative and reporting burden, it also provides investors with more data points and helps eliminate 'greenwashing.' Many of the new rules can curb unrepresentative sustainability claims. Triton believes this drive for transparency should enable private market investors to use capital under management to meet client mandates while also demonstrably supporting more sustainable outcomes.
Societies and economies around the world, the global environment, events, and political decision-making continue to pose challenges. The impacts of climate change are mounting. 2023 was the warmest year on record, with heatwaves and extreme weather events causing fatalities and destruction of property worldwide. This year marked the first time the average global temperature exceeded 1.5ºC above pre-industrial levels, the stronger target for maximum warming set by the Paris Agreement. In parallel with the climate crisis, the world continues to lose biodiversity across ecosystems at alarming rates.
There is potential for significant policy change. In 2024, over 40% of the world’s voters will be eligible to participate in elections, including in major population canters such as India, Pakistan, Mexico, the US, and Indonesia, as well as in numerous European jurisdictions like Germany, France, and the UK. Major conflicts continue in Ukraine, Sudan, and Gaza, while tensions persist in the South China Sea. Famine remains a threat to entire populations, including in East Africa. Meanwhile, the threat of cybercrime is rising, becoming a growing category in the list of business risks.
Amid this evolving backdrop, key sustainability-related regulations that affect private market investments in Europe include the EU Green Deal—a comprehensive policy initiative aimed at combating climate change and promoting sustainable economic growth. The EU Sustainable Finance Disclosure Regulations introduced mandatory ESG disclosure obligations for the financial sector and allow the categorization of investment funds based on sustainability criteria. The EU Taxonomy is a framework that identifies and categorizes environmentally sustainable investments. Additionally, the EU Corporate Sustainability Reporting Directive, another regulatory driver increasing non-financial disclosure, requires large companies to report on their ESG performance, supply chains, business relationships, human rights impact, and climate-related risks and opportunities.
Other rules that require data and reporting include the Energy Efficiency Directive, the EU Deforestation Regulation, and the Task Force on Climate-related Financial Disclosures (TCFD).
We believe sustainability disclosure can be linked to performance. The TCFD was developed to drive transparency on climate-related risks and opportunities in financial markets, as well as foster a greater understanding of climate change. Public market research by the Bank of England and PwC, for instance, found a positive correlation between corporate stock prices and the number of TCFD disclosures made. This may be because investors reward companies that lead in managing climate-related risks, because TCFD adoption identifies companies that are more naturally disposed to long-term strategic thinking and planning, or because greater transparency generally instills confidence, reducing perceived risk associated with returns.
The Task Force on Nature-related Financial Disclosures (TNFD) is a newer framework similar to the TCFD, which aims to drive greater disclosure on biodiversity and nature-related risks and opportunities.
While investing in sustainability-related challenges brings multiple risks and regulatory responses, many private equity firms also identify opportunities to deploy their clients' capital toward growing companies that offer solutions to these challenges. At Triton, we overlay sustainability themes across our sector-driven investment strategy, targeting businesses that bring goods and services to market that we believe align with sustainability themes and drivers. For example, we have recently invested in companies meeting demand for infrastructure services, grid components, growing healthcare demands, and building security.
Consistent and robust reporting and disclosure can build confidence among investors that their capital is being managed in ways that meet agreed-upon mandates around both sustainability risks and opportunities. The increased burden of administration and reporting is worth the improved transparency that new regulations bring.
