The financial sector, like all sectors, has been forced to adapt and transform itself in response to the new realities of the modern world: decarbonisation, corporate responsibility, the energy transition, net zero... Private equity has found itself ever more under the microscope of the ESG analysts, with modern investment portfolio management inextricably bound to social, economic and political responsibility. Some investment houses have been taken this new reality in their stride.
The energy transition and net zero targets have, more than any other market phenomenon, transformed the investment sector in such a way that old approaches will forever remain just that, old. Financial players have accepted that economic success today relies on measurable social conscientiousness. PE houses all have that desire to 'do their bit', to meet the expectations of various stakeholders (investors, LPs, employees, civil society, regulators, etc.), to differentiate themselves from their peers and communicate a possible carbon advantage, and to measure their carbon exposure and transition risks. Profitability now depends on it.
ESG criteria have become central facets of risk management strategies, and it has begun to dawn on investment house CEOs that adhering to a robust ESG strategy is crucial to long-term value creation. It is now indisputable that PE's position as a major player in the global financial system has huge potential when it comes to tackling the climate crisis, according to the Harvard Business Review. PE assets are projected to surpass $11 trillion by 2026. Circa. 10,000 PE firms worldwide oversee more than 20 million employees spread across 40,000 portfolio companies. A commitment to green finance and green investments could have the power to be transformative.
A decade of changing attitudes
Over the last decade, PE firms have come to realise the crucial role they have to play in the global struggle to get global warming under control, as well as other major challenges facing humanity today. But ESG, from a financial perspective, has become a key component of portfolio profitability. According to Principles for Responsible Investment (PRI), "nearly 75% of the 633 private equity investors that reported to the PRI in 2021 (598 investment managers and 35 asset owners) said they assess ESG materiality for individual companies... rather than only looking at industry-level factors."
PE's unique position within portfolio companies in terms of governance, ownership and management means it is well placed to oversee the ESG transition. "Our investment model whereby we are often in control ownership positions and have a long-term perspective and our expertise can help our portfolio companies advance their ESG journeys," said Elizabeth Lewis, the deputy head of ESG at Blackstone.
"We aim to be a responsible investor. Our approach is one of constant improvement in this area," said UK investment house Bridgepoint's CEO, William Jackson. "We invest in all stages of the ESG maturity curve with the intention of making a difference and making sure our portfolio companies make a difference."
Some firms have been hot on the heels of innovative, sustainable projects in the framework of the energy transition, for over a decade. A good example is the French-based PE firm Ardian. The firm has long put a robust ESG strategy at the heart of its investment management approach, leaning on innovative, socially responsible ideas and rethinking wealth distribution through employee ownership schemes across its portfolio.
"Our criteria for investing in companies and infrastructure are evolving considerably, precisely to incorporate ESG criteria in a very rigorous way. By reinventing the way we invest today, we can jointly ensure the performance of our industry and the long-term development of our companies," said the firm's CEO, Dominique Senequier.
Hard impact investment
This embrace of impact and ESG investing by the big global private equity firms has led to high growth and some serious attempts at value creation through green finance project. Industry body the Global Impact Investing Network calculates that the market is now worth $1.2tn. In 2021, for example, TPG, the Texas-based private equity firm, said it had raised $7.3bn for a climate-focused impact fund, TPG Rise Climate, from backers including the Ontario Teachers' Pension Plan and insurance company Axa. As part of the $14 billion TPG Rise global impact investing platform, TPG Rise Climate leverages the capabilities of Y Analytics, TPG's public benefit LLC dedicated to understanding, valuing, and managing the social and environmental impact of its investments.
"Our limited partners - both institutional investors and large multinational corporations - have joined us with a common purpose: to rapidly finance and scale climate solutions that meaningfully reduce or avert greenhouse gas emissions. It is a privilege to be working with our investors and climate innovators around the world to build a new net-zero economy," said Hank Paulson, Executive Chairman of TPG Rise Climate and former U.S. Treasury Secretary.
Ardian, for example, has a CEO wholeheartedly committed to the modern ESG approach. The firm has made it its mission to accelerate the energy transition through clever investments in green energy projects. "It is becoming increasingly important to find more local energy sources and prioritise greener supplies," said Ardian's Marion Calcine, Senior Managing Director and CIO for Infrastructure, in an interview with Infrastructure Investor . "These are markets where we have a lot of experience with a portfolio of more than 8GW of renewables."
Of course, measuring impact can be a real issue for PE investors. Clear climate targets are somewhat more easily auditable, but social targets less so. This can lead firms open to the accusation of greenwashing. This is not putting off investors, however. The blurring of impact and ESG investing within new regulatory frameworks is indeed a challenge, but one worth overcoming, especially in a context of the increasing threat of global warming. Financial players must seek to reduce the emissions linked to their operational activities (travel, offices, equipment, etc.), but also and above all simultaneously reduce the volume of financial flows to carbon-intensive players (e.g. the fossil fuel sector) and increase those to decarbonised and decarbonising activities (which help to decarbonise our economy).
