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The introduction in 2019 of the European Sustainable Finance Action Plan (SFAP) once again highlighted the contrasting legal frameworks in which the European and Anglo-Saxon financial sectors function today. The American model seems less pliable in a world evermore focused on sustainable practices, green taxonomy and climate change. Europe has taken a global lead in sustainable business across many sectors since the unveiling of its European Green Deal goals of achieving carbon neutrality by 2050. Considered in a long-term context, the European approach seems ahead of the curve.
A European approachEurope remains the world’s largest economy, home to significant investment portfolios, private debt investment firms and private equity powerhouses. But legal constraints as well as differences in approach can allow European investment companies to make a real difference, not least thanks to new EU legal frameworks and sweeping culture change.Many European lawmakers have long bemoaned the Anglo-Saxon approach to capitalism within the bloc. Paul Tang, MEP for the Dutch Labour Party, said: “I have always been surprised how quick the Anglo-Saxon ideas of shareholder value and remuneration have been introduced in Europe. I don’t think they were very European from the start.” Going further, Wolfgang Kowalksy, Senior Policy Advisor at the European Trade Union Federation, has stated that the shareholder value model has not been able to answer major challenges of our time such as climate change and income inequality, with far-reaching legislation needed to re-align European businesses onto a more sustainable path.

Indeed, Europe’s new-founded commitment to sustainable finance and ESG criteria is key to this widespread realignment and to reaching its European Green Deal objectives, and the finance sector has therefore had to adapt the new realities of the modern world… Profit is no longer the ultimate goal. The SFAP is focused on taking sustainability “considerations into account when making investment decisions in the financial sector, leading to more long-term investments in sustainable economic activities and projects.” The big players in European private equity have been leading the way.

Sustainability in Private Equity

Of course, the question of sustainability has become paramount to investment firms of both sides of the Atlantic. Back in March 2021, then-acting chair of the U.S. Securities and Exchange Commission Allison Herren stated that “Human capital, human rights, climate change — these issues are fundamental to our markets, and investors want to and can help drive sustainable solutions on these issues,” in front of an audience at the Center for American Progress. “We see that unmistakably in shifts in capital toward ESG investing … [W]e understand these issues are key to investors — and therefore key to our core mission.”

In Europe, this approach is having a real positive effect on private markets, according to the Financial Times. Citing research from PwC, the FT highlighted how “ESG private market assets could hit between €775.7bn and €1.2tn by 2025, up from €253bn in 2020, as regulation and client demand force an overhaul of private equity, real estate, infrastructure and private debt funds.”

Indeed, the introduction of new regulations regarding sustainable finance disclosure has revolutionised the European investment landscape, according to Olivier Carré, financial services market leader and sustainability sponsor at PwC Luxembourg: “We think [ESG will result in] a structural reboot of the industry,” he added. “We strongly believe that [general partners] with strong ESG skills and focus will not only have better investment performance but also higher shareholder and stakeholder recognition.”

“As a private investment house, we are convinced that the most sustainable companies will have the greatest long-term value to all stakeholders,” said Dominique Senequier, CEO of French private equity firm Ardian. “It is essential.”

Ardian is a perfect example of a European PE firm for whom ESG requirements are no longer a fringe issue, but central to their investment strategy. Social mobility, climate action, and profit sharing are now essential to such firms’ general approach to finance. Ardian has underlined how it seeks to achieve these goals through sustainable investment and corporate action, and they are not alone. Many PE firms have been turning to sustainable investment over the last decades, and it has been proven that this strategy can add real value to investment portfolios.

Europe leads

The legal framework set in stone by the European Commission has led to an explosion of sustainable investment in the EU compared to the U.S. According to Morningstar, there are $1.83 trillion of European assets in sustainable investment funds, compared to just $300 billion in the U.S, with little sign that Anglo-Saxon firms are catching up.

This adherence to ESG expectations have shown European investments funds to be far more resilient than expected. The new focus on sustainable practices has, in reality, opened up new investment opportunities, improved the fundraising environment, and shown many firms to be innovative and adaptable in the face of global crises, from climate change to the pandemic.

With U.S. fund managers being forced to comply with new ESG rules in European markets, perhaps the tide may yet turn. “The big unknown is…how established these standards become beyond Europe,” said Andy Pettit, European policy research director at Morningstar.

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