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The big picture

by Contributor 11 November 2021

Another raft of regulations! You can hear the sighs around Europe these days when GPs and LPs look into the details of the EU Sustainable Financial Disclosure Regulation – in short SFDR. Don’t we have enough to deal with already, with AIFMD and MiFID II? Now we need to embark on something entirely new, namely disclosure with regards to the environment. Urgh.

And indeed, there is much to digest and much is still unclear. Is this fund light green or dark green? Or maybe it is a darker light green? And what does the asset manager themselves do to make sure they do not have a negative impact on the environment? We will need to have answers ready for all these questions soon. Advisors are helping us to navigate through this unfamiliar territory. It is costly and time-consuming.

But wait. May I invite you to take one or two steps back from all these ramifications and remember the big picture?

Global average temperatures have risen by 1.2°C compared to pre-industrial levels and we are well on track to go above 2°C by 2050. What’s the big deal? The big deal is the effects of human-caused global warming are happening now, are irreversible on the timescale of people alive today, and will worsen in the decades to come. Let that sink in, please.

Droughts, storms and floods have sadly become the new normal and will become even more extreme. We should not fall into the trap of relating that only to our immediate environment in Europe. For us, it might be a matter of getting better insurance for our house. Thinking
about it, maybe we might want to invest in insurance-related businesses, as it seems like there will be more demand going forward. This is cynical, of course. We might have sufficient resources to deal with these problems here, but in other parts of the world, the effects of climate change are a matter of survival. Millions of people will soon need to migrate simply to stay alive. European countries can no longer ignore this and pay for refugee camps outside their borders. Soon, migration will have a completely different dimension, not only in Europe but around the world.

So what can we do? Keeping temperatures below the 1.5°C level compared with an increase of 2°C or more will make a huge difference. It will be the difference between whether our children and grandchildren will live in peace or will be at war with nature and neighbours. If you think I am exaggerating, read the IPCC Report. This is not Project Fear again, this is real.

Covid-19 has presented a further issue, as countries struggle to get their economies back on track. Climate action is expensive and is taking a back seat for some right now. When global leaders meet in Glasgow for the next big climate conference (COP26), they will admit the increase in CO2 emissions has not reversed but has in fact accelerated. Repeating the well-worn commitments of previous years is useless if there are no actions taken.

So against this background, we should applaud the European Commission for creating the Green Deal. They have done the right thing and produced a raft of new regulation. The EU Taxonomy defines, in an amazing degree of detail, which business activities qualify as sustainable. Companies will need to be transparent about their sustainability going forward, as will the asset management industry through the SFDR. Setting up these frameworks will serve as a benchmark for other continents. And while these frameworks are not perfect, the approach is the right one.

A raft of new regulations – maybe we should look at it differently: it is our chance to contribute to the global effort to protect the world for future generations. Private equity takes climate action – that sounds pretty good.

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