Sustainable and accountable investing and reporting is here to stay. ESG (Environmental, Social, and Governance) is now one of the most dynamic and fastest-growing markets in the world. To remain competitive, Mauritius should strategically position the jurisdiction in this changing landscape.

Shift in paradigm

With an increasing interest in ESG, we can expect that this is not a short term phenomenon but a concept that will bring about a significant shift in the global investment paradigm. The main reasons being:

1. A shift in investor demand – with the impetus of Millennial and Generation Z LPs, we are witnessing a change in investor requirements. We’re seeing a shift away from the traditional financial return maximization model, towards a more inclusive type of investment that incorporates impact and sustainability. This is to the extent that sound ESG policies will soon be a prerequisite to investing.
2. Improved returns – not only crucial in attracting investors, there is emerging evidence that the financial performance of private equity funds and integration of ESG considerations are correlated. It will also help deliver returns - be that during the life of the fund or at exit.

Regulations around ESG standards

One of the consistent drawbacks for ESG is a lack of universally recognised standards. In their absence, the World Economic Forum, the International Business Council and the United Nations Development Programme are the industry gold standards.

This is changing, and jurisdictions recognise how agreed standards bring greater security. More recently, the EU’s Sustainable Finance Disclosure Regulation (SFDR), which came into force in March 2021, aims to make the sustainability profile of funds more comparable and easier to understand for investors. The key objective is to have a set of harmonised rules for the financial industry, with regard to the integration of sustainability related information and financial products.

The SFDR sets requirements for fund managers based in the EU, as well as those managing capital raised in the EU, i.e. managers based in the UK, the U.S, Asia or Africa who are raising funds in Europe. Funds with European LPs must now ensure to make additional disclosures on their websites, fundraising documents and periodic reports about ESG policies and adverse sustainability impacts.

Opportunity for the Mauritian International Financial Centre

Where the EU leads, other jurisdictions will follow. Mauritius could soon follow a similar approach. Creative interpretations of principles and best practice have seen investor scepticism around how strong the ESG proposition of some funds are. With a track record of enhanced scrutiny in regards to corporate governance, Mauritius is well placed to apply the necessary rigour around the review and reporting of ESG-focused investments.

The experienced community of Mauritius’ independent advisors, administrators, auditors, non-executive directors and fund managers to ensure robust and accurate ESG reporting will be extremely attractive to wary investors.

Opportunity for fund administrators

An increasingly robust ESG landscape in Mauritius could see opportunities open up for fund administrators to assist GPs along their ESG implementation journey. This will see Fund Managers increasingly focus on building the right framework, collecting data and reporting.

Policies and framework

The fund administrator should be able to hand-hold the GP in drafting an ESG framework or policy in line with their investment strategy and investor demand, reflecting how local fund administrators already assist GPs with fund documentation and investor due diligence.

Reporting

The fund administrator can now also propose the services of collating ESG metric data from investee companies and provision of statistics to the GP. This will help clients to adequately measure performance against set targets and produce reports that enable investors to evaluate the achievement of defined targets.

Data analysis and advisory

Over and above assistance with reporting, the savvy fund administrator can also provide technological and analytical tools for the investment manager to make more informed decisions. By applying the actionable data and analysis provided, the GP can then implement an ESG strategy that creates value throughout the investment lifecycle.

In summary

As a fund administrator, IQ-EQ witnesses first-hand the positive impact a robust ESG strategy has on our clients throughout the lifecycle of their funds. This includes:

• GPs who are able to clearly articulate their ESG proposition, exceeding fund raising expectations
• Funds being able use their ESG credentials to build their portfolios more effectively. This is by differentiating themselves from their competitors in markets where a lack of supply makes bidding for assets extremely competitive.

Whilst ESG principles are not new, the emerging framework is still in its infancy. With no common regulatory framework, investors face a great deal of risk. However, Mauritius is well placed to help fund managers demonstrate robust governance and reporting to satisfy these increasingly sophisticated demands, given that substance is the cornerstone of the island economy as a globally reputed financial centre. It is clear that ESG is here to stay, and with it comes welcome opportunities for Mauritius to remain a dynamic player on the global stage.