Private equity (PE) is well placed to lead sustainable investing. The industry is large – so large that society won’t be able to tackle the climate crisis and other major challenges without the active participation of PE firms and their portfolio companies.
In the last 15 years, the industry has been a steadily growing area of interest for limited partners (essentially silent partners, who have less liability then general partners and do not participate in business operations) because it offers diversification from listed assets. In 2021, the PE industry reached more than US$5 trillion in assets under management, with expectations to grow well beyond $11 trillion by 2026.
Research by BlackRock shows that PE outperformed the S&P 500 and MSCI World indexes by 2.8 and 4 percentage points a year, respectively, between 2002 and 2020.
While the PE industry has been slow to dive into ESG, there are signs that PE investment is starting to align with global ambitions for a sustainable economy. But where to find those signs?
“Follow the money,” says John Ruffolo, the founder and managing partner at Maverix Private Equity. “The finance industry is changing, and private equity is now responding to a whole range of new factors, including pressure from [limited partners] to consider ESG.” A 2020 INSEAD study called Green Shoots: Can Private Equity Firms Meet Responsible Expectations of Their Investors? found that 90% of limited partners factor ESG into their investment decisions, and 77% use it as a criterion in selecting general partners.
As of May 2022, the Net Zero Asset Managers initiative (an international group of asset managers committed to net-zero) had grown to 273 investors who collectively manage US$61.3 trillion. PE funds that invest solely in renewable energy assets raised about US$52 billion last year, a record, according to Bloomberg, and the available capital for such funds is about 25 times more than the amount flowing to fossil-fuel-asset funding. InBC Investment Corp. made its first investments in 2022, choosing a trio of Vancouver-based funds focused on entrepreneurs driving climate change action, advancing reconciliation efforts, and innovating for the future. Two years prior, in 2020, KKR announced an investment in Q-Park, a leading European parking garage operator. The investment’s intent was to support Q-Park’s transition to a more sustainable business model, including the adoption of electric vehicle charging stations and the implementation of energy-efficient lighting and heating systems.ESG is the private equity industry’s next frontier | Corporate Knights