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IS SUSTAINABILITY RECALIBRATING PRIVATE EQUITY?

about 1 month ago

The Global Impact Investing Network (GIIN) 2020 Annual Impact Investor Survey estimated the impact investing sector at $715 billion globally. Private Equity is one of the most active asset classes in the industry and has seen a significant uptick in capital flows into impact strategies. Private Equity firms have been criticised, in the past, for their low levels of transparency and accountability. However, recent demands from LPs on GPs, have seen a differentiation in how Private Equity firms commit to capital across environmental, social, and governance, pillars. Whilst this is an evolving discipline, the UN SDGs have been a credible cardinal point to both LPs and GPs.Private Equity funds' commitment to SustainabilityPrivate Equity firms increasingly recognise the importance of sustainability. This is typically called "impact investing" and involves measuring environmental, social, and governance (ESG) metrics before investing in a company. The impact investing institute found that 97% of survey respondents believed that asset allocation to impact investing had increased over the past two years, and 75% of respondents believed that “impact investing has become mainstream”. Private Equity firms are also collaborating with environmental organisations to develop new tools and strategies for measuring ESG performance. For example, the Private Equity Growth Capital Council (PEGCC) recently partnered with the World Resources Institute (WRI) to create a global framework for evaluating companies based on their commitment to sustainability goals and climate change objectives. Further to this, Private Equity funds such as Bridgepoint, CVC Capital Partners, EQT, and Apax have all become signatories of Article 9. This means they must meet specific criteria when assessing potential investments, including environmental impacts, social aspects, and governance principles. “There is surging interest in impact from both institutional and retail investors, and a large proportion of that being driven by investors’ desire to have investments aligned with their priorities and values. Regulation is also a factor, as several net-zero initiatives are gathering momentum globally that incentivize impact investments.”— Matt Autrey, Partner, Primary Investments - Private Equity International (PEI) InterviewNew Private Markets recently reported that a 'significant acceleration of LP interest' in climate had helped Lightrock close a EUR860m fund. This example demonstrates that the Private Equity sector is increasingly incentivised to take sustainability seriously, as LPs are increasingly likely to allocate their capital to funds prioritising sustainability. Are critics correct in arguing for Sustainability activity amongst Private Equity funds being driven by industry trends?Despite the surge of Private Equity initiatives geared toward sustainability, some critics have suggested that much of it is merely "greenwashing" — masking the actual need for demonstrated change whilst still vying for commercial wins. Thus, while Private Equity increasingly takes sustainability seriously, there's much debate over whether or not it has genuinely embraced sustainability as a core part of its business model. If this trend continues and the sector begins to devote significantly more resources to sustainable investments, then perhaps we can say that Private Equity is indeed leading the charge for sustainability. Andrea Bonomi – Invest Industrials Chairman, says Private Equity is "a natural home" for environmental, social and governance (ESG) activities. "We are longer-term investors," he says. "We have to be able to hold our businesses for 10 years, and over that timeframe, no one can ignore ESG".Is this bad if Private Equity sees and embraces the global trend rather than trying to save the world? The truth is that Private Equity funds are responding to the demands of their investors, and ultimately, it's up to them (and their investors) to decide how they allocate capital. That said, as more investors become aware of the long-term risks associated with Sustainability issues, Private Equity will likely have to take Sustainability even more seriously to remain competitive. For example, specific ESG requirements may need to be met before an investor even considers a fund for investment. Ultimately, if Private Equity can use its resources and influence for good – by investing in sustainable projects or businesses – this could be seen as a positive step towards achieving global sustainability goals. Is there a demand for ESG talent?The demand for qualified ESG talent across sectors and industries exceeds the supply. GreenBiz’s Joel Makower covered last year, "the ESG talent war can be characterised as an all-hands-on-deck situation with too few skilled hands and lots of decks to manage. Weeks out from the start of Q4 2022, hands are still in short supply while more ships are setting sail — including those navigating private market waters." David Stangis - CSO at private equity firm Apollo Global Management commented, "I get the question literally every day". "How can I break into ESG? I often get asked, for example, ‘What's the one course or certification I need to get into this space?’ — but that doesn't exist." So how does Private Equity meet the talent shortage in ESG? Private Equity firms have responded to the ESG talent shortage by leaning heavily on external resources, such as independent consultants and boutique advisory firms. In addition, many Private Equity firms are cultivating in-house teams of specialists who can manage the rigorous demands of sustainability due diligence and ongoing monitoring. Other firms are investing more heavily in technology and data solutions that can help streamline processes related to ESG management. In the short term, funds need to be more flexible about where they source experienced professionals, which may extend beyond traditional ESG roles. Private Equity firms can look to other sectors and industries, such as non-financial corporates or banking, to find experienced individuals with the necessary skills to support their sustainability initiatives. Ultimately, combining external resources, internal teams, and technology solutions can help Private Equity firms stay competitive in an increasingly crowded market while meeting their sustainability goals. Investment teams must have access to sustainability expertise with experience and knowledge about financial markets in general and Private Equity specifically. It is likely, therefore, that there will be a continued demand for in-house ESG expertise and the appointment of ESG specialists to increasingly senior roles. Conclusion: The Sustainability movement cannot be done without the help of Private Equity firms. Their recent influx of investments has been seen as a step in the right direction and strengthens the belief that they are taking the lead in Sustainability initiatives. However, some critics remain unconvinced, citing that their (GPs) interest could be attributed to pursuing a trend. Ultimately, their intentions must be judged against their hard evidence of results. Regardless, there is little doubt that Private Equity firms are key to furthering Sustainability and developing innovative new solutions.If you would like to share your opinion or learn more about sustainability efforts supported by Private Equity firms, get in touch with us today at info@altus-partners.com.