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 Sustainability
Private 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) Interview
New 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.