Understanding the ESG ecosystem

The world of ESG is moving quickly – but the main roles are starting to become clearer.

By Peter Wilson

8 minute read time

Who is driving the fund sector’s growing focus on environmental, social and governance factors, and which responsibilities are falling on to the various stakeholders?

The world of ESG is moving quickly – but the main roles are starting to become clearer. So what experts should fund managers look to, in order to help with the heavy lifting? Here, we break down who is responsible for what in the ESG funds space.


Investors and consumers are ramping up demand for ESG but government policies and regulators are still setting the pace.

So far, the EU has been particularly active in this space and is now implementing two regulations that will maintain the focus on the funds industry. The Sustainable Finance Disclosure Regulation (SFDR) imposes new transparency and reporting requirements on funds and their products, while the Taxonomy Regulation is standardising the language for sustainable activities.

“We are very much being influenced at the moment by the EU,” says Emily Hamilton, head of ESG at Savills Investment Management (Savills IM), which has a rapidly-growing real estate portfolio. “The new SFDR regulations apply to private equity and alternative assets, like real estate, and we are still waiting to see what comes out of the taxonomy for real estate.”

And popular fund domiciles are responding: Guernsey has already launched the world’s first regulated green fund and Jersey has mapped out its own 10-year strategy for more sustainable fund management. The most pressing UK regulatory pressures are the plans for compulsory disclosures by large asset owners and listed firms in line with the Taskforce on Climate-related Financial Disclosures (TCFD).


Regulatory scrutiny and banks’ own policies are giving ESG risks a higher priority in their credit models, with important implications for lending policies.

“Banks are already offering green loans and sustainable credit products but they are also adopting an ESG focus right across the board,” says James Hamelin, an associate director at RBS International, who deals with fund and real estate-related lending.

“In the future, I believe that funds who show little interest in ESG but wish to borrow money, will likely see an impact on pricing or, worse still, some banks will not have the appetite to lend to them at all.

“We have begun prioritising sustainable activities to ensure our capital allocations support society’s climate ambitions.


Depositaries are an increasingly important player in the ESG ecosystem, although arguably their role is carried out under the radar. Few end investors are aware of the responsibility the depositary has in terms of the oversight of a fund, but by providing independent review, they can help to ensure that funds are delivering in the best interests of consumers. As investors, governments and regulators continue to raise expectations in terms of funds’ ESG goals, the depositary’s role will become increasingly important in providing independent oversight and challenge, data-driven scrutiny of portfolios, and serving as a vital link between the fund and the regulator.

Chris Day, assistant director of funds regulation and governance at NatWest Trustee and Depositary Services, notes that the profile of the depositary in this space is continuing to grow: “Depositaries are at the heart of effective governance and investor protection. This means that they are increasingly turning their attention towards ensuring that their clients are meeting ESG targets and living up to the expectations of consumers and regulators.”


The Pensions Regulator’s introduction of ESG reporting requirements on pension trustees is just one source of the growing expectation from investors for more engagement on ESG by fund managers.

“Investors are demanding so much more information and transparency and that means a lot more collaboration, or the investor will just go and invest their money elsewhere,” says Hamelin.

“We financed the refurbishment of a property in Italy, for example, as a green loan, which meant that we’ve now got certain sustainability criteria that the property needs to meet in order to meet its loan obligations”

Emily Hamilton, head, ESG, Savills Investment Management

“Fund managers that aren’t receptive to investors in this space are going to be left behind, so managers are working much harder to understand what their investors want.”

Some 89% of Limited Partners who have signed up to the UN Principles for Responsible Investment now use some form of responsible investment due diligence questionnaire as part of their fund selection process.

Hamilton says the Savills IM investor relations team “are spending more time than ever answering due diligence questionnaires from investors on climate change, diversity and inclusion, what are we doing about reducing our carbon emissions… Then they are constantly providing information, answering questions and making sure everything’s transparent.”


ESG teams and consultants

Most funds now have at least one person in a specialist responsible investment role, but Emily Hamilton of Savills IM says that even funds large enough to afford big ESG teams need to integrate sustainability duties across all departments.

“The ESG team can provide guidance on strategy about what needs to be measured and managed, but a lot of its role is about upskilling our teams at the coalface to do it themselves because you’re embedding it into the company’s DNA and culture,” she says.

Many funds complement their in-house expertise with external ESG consultants. She says this is: “Because the really good institutional investors are simply not investing in organisations or in assets that cannot demonstrate these criteria.”

Investment strategists

Sustainability is now considered early in the identification of assets to purchase, whether they are portfolio companies or real estate properties.

“A private equity investment team will be asking: ‘How ESG-focused is the portfolio company that we’re looking to buy, and if it’s not, can we influence it in a positive way that fits within our strategy?’” says Hamelin.

“They will do a lot of due diligence because when they present a potential acquisition to an investment committee, ESG will then be one of the risks they will analyse. That means the investment team really has to get a handle on ESG factors.”

Hamilton says transaction managers will assess a property’s energy rating and performance standard “right from the start”.

Finance and treasury teams

Finance teams, especially those with sustainable credit products, are now having to understand and comply with the reporting requirements of the lenders, to ensure they are tracking their ESG targets and the opportunities for sustainable credit products.

Increased disclosure requirements, such as those from the TCFD, are placing an emphasis on not only climate as a new risk type but also as a factor under traditional risk metrics (credit, solvency, liquidity etc).

“We financed the refurbishment of a property in Italy, for example, as a green loan, which meant that we’ve now got certain sustainability criteria that the property needs to meet in order to meet its loan obligations,” says Hamilton. “To finance real estate we’re having two-pronged conversations about how sustainable is the physical asset itself, and how sustainable are the tenants.”

Separately, the Swedish private equity firm EQT has linked the pricing of a €5bn fund-level bridge facility to the portfolio’s performance on gender equality, renewable energy adoption and sustainability governance.

Fund operations

New demands are being placed on functions ranging from the HR team’s need to recruit and develop a firm’s ESG skills to the technology challenge of processing large quantities of new types of data.

RBS International’s Hamelin says that many different external providers are developing ESG platforms to help with data collection and analysis support.

Legal teams are also being strained by investors’ desire to negotiate side letters with specific reporting requirements or demands.

A recent study found that 69% of private equity General Partners are already making a formal commitment to responsible investment in their Limited Partner Agreements, but some investors are also demanding that ESG be added as a standing discussion point for Limited Partner Advisory Committees.

Asset managers

Much of the ongoing workload of monitoring ESG data, and trying to improve performance, falls on to asset managers charged with dealing with private equity portfolio firms or tenants and properties in the case of real estate funds.

“It’s largely about working collaboratively with the tenant or the management of the portfolio company,” says Hamelin.

Savills IM is using an environmental data platform, “but then it’s the responsibility of the asset management teams to engage with that data to be able to report that back to the investors,” says Hamilton.

There is one major challenge from a real estate perspective, she says: “The disconnect in sharing data between landlords and tenants because as owners we can struggle to obtain the data we need on energy and waste.

“At the same time a lot of the progress on ESG is being driven by the demands of occupiers, particularly in offices when you have large corporate occupiers insisting on sustainable spaces.”

Auditors and insurers

Real estate valuers and corporate auditors are also increasingly factoring in ESG considerations into market valuations. Since April last year, landlords can no longer let properties covered by the MEES (Domestic Minimum Energy Efficiency Standard) Regulations if they have an EPC (Energy Performance Certificate) below E.

A recent Urban Land Institute study found that most real estate investors felt that climate risk was being inadequately considered in valuations but that would have to change soon.

Hamelin says “We’re seeing a little more commentary from valuers on ESG factors – it’s slowly creeping in there but it’s probably not at the level that it will be in two to five years’ time.”

Some insurers have also begun to raise prices or even refuse to issue new policies in high-risk areas, raising the prospect of assets becoming uninsurable or ineligible for debt financing.

“I think you’ll definitely see insurers incorporating ESG risks into premiums for higher risks, so that is just another area where investors have to be aware of the ESG impact,” Hamelin says.


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