Investors who want to support a more equitable society and a healthier planet have a rapidly widening range of options. Indeed, faced with such choice, some investors may not be fully aware of how discerning they can be about what their capital does and how it does it.
Once a decision has been made to invest in an impact-aligned strategy, what then? What actually happens with the money?
Here we look at four types of investment we use when investing to tangibly deliver on client sustainability and impact goals.
Why private assets play such an integral part in impact
Large public companies will certainly be able to raise capital and contribute to sustainability goals. However, these firms alone will not be able to do nearly enough. The bulk of the capital needed to develop - or scale - the most impactful technologies or financial solutions, will come through private markets.
Private companies often benefit from strong ownership, active governance, and the long-term perspective of their owners, without the pressure to focus on quarterly financial results. Private ownership also typically means investors are very close to the underlying assets, with meaningful influence on management regarding the company’s trajectory.
In terms of volume, private assets have grown massively over the last 20 years offering investors more choice, while the universe of listed companies in developed markets has been in decline over the same period. Not all private asset investments will directly contribute to climate action, but the opportunity set overall is exceptionally wide and varied.
But what, exactly, do these private asset investments look like? Here we look at four key opportunity types within private assets, and explain how they contribute to climate protection and social equity.
Opportunity number 1 – Infrastructure
When talking about investing in impact, climate change and renewable energy are often front of mind. Rightly so. Renewable energy is a huge topic when it comes to climate change mitigation.
According to the International Energy Agency (IEA), renewable energy capacity needs to be scaled up six times faster than current build rates. If not, we won’t reach the goals set by the Paris Agreement. Private capital will be essential to this effort.
However, infrastructure can also generate positive social impact that will contribute to a more sustainable future, addressing structural inequalities in our societies.
Our team has invested to significantly improve rural connectivity in Sub-Saharan Africa, with the provision of debt to a telecom provider focused on mobile network access in underserved communities. Digital infrastructure is crucial to enabling money transfers, insurance subscriptions or paying of school fees; entirely conducted via mobile phone in these areas. Accelerating digital inclusion in growth markets is a key driver of sustainable growth and shared prosperity, but traditional business models have not served these markets and we are proud to have been part of the answer to that oversight.
The company in question aims to build 10,000 base stations in more than 20 Sub-Saharan countries, serving a total population of 35 million people. The portfolio is spread across different countries, with exposure to a significant number of Least Developed Countries (LDCs) such as DRC, Liberia, Congo and Guinea.
Opportunity number 2 – Private equity
Private equity (PE) is fundamentally about value creation through growth and operational improvements.
The redesign of an existing production line within a traditional production company might be initiated with the goal of improved efficiency, reliability, and reduced costs. That might be the primary goal. However, the more efficient production line may result in lower energy consumption, which in turn helps towards net-zero goals.
Active ownership, a long-term investment horizon, and a strong focus on value creation, all make the asset class very well-suited for achieving climate action goals.
Of course, private equity funds can also make the ‘E’ in ESG a far more explicit goal. They can ensure it is a focus during due diligence, and push portfolio companies to strengthen their ESG approach, as well as disclosing ESG data across their entire portfolio.
Our private equity team has completed more than 100 direct/co-investments aligned with UN sustainable development goals (SDGs). We know how vital this investment focus is for the long term.
One recent example is the co-investment into a leading solar photovoltaic (PV) racking provider in the US. The business has been operating for over 20 years and delivered the mounting systems required for over 1,000,000 solar PV installations.
These renewable energy systems are used both domestically and commercially to provide fully renewable/sustainable power in commercial production facilities. This model reduces pollution and makes production processes far more efficient, cleaner and cheaper over their lifetime. This drives environmental benefits and supports improved profitability. This example is typical of the private equity impact investments we are sourcing.
Another recent PE investment example is into a leading consumer-to-consumer trading platform which enables asset owners to buy and sell products that they no longer need. This model represents a huge growth opportunity. We expect to see re-commerce, or the “second-hand economy”, grow hugely in importance over coming years. Here the PE team again co-invested into a profitable business alongside a core GP, with plans to expand the offering into new products and into new territories.
For every product that can be traded second hand, the materials, production cost, energy and consequent CO2 emissions generate from producing a new product can be avoided. This results in significant environmental benefits.
Of course the re-commerce model still requires logistics and distribution with some environmental costs, but these are minimal compared to the production and distribution of brand-new products. In times of recession, we believe there is a significant social benefit by opening up second hand trading as a mainstream model without any stigma attached, enabling wider demographics to benefit from access to goods that might not have been possible previously.
Opportunity number 3 – Real estate
Real estate is an inherently social asset, impacting us directly and indirectly, every day. It is the environment we have created for ourselves. It impacts what we do, how we act, what we learn and with whom we interact. It even affects living standards, health, and prospects in life.
Crucially, there are communities that do not currently have access to the right properties. Investing into these communities can meaningfully contribute to positive social impact. Specific areas of investment could include, but are not limited to:
1. Improving the provision of shopping, leisure, and community amenities to support revitalisation
2. Improving workplace provision, to increase the growth of social, public and/or private enterprises, as well as increased employment and training opportunities
3. Increasing supply of high-quality, affordable homes to support improved living standards and wellbeing within communities for residents. These may include social, affordable, market, rented, ownership and shared ownership housing tenures.
Real estate’s role in adapting to mitigate climate change is also immense. Real estate contributes around 40% of total global CO2 emissions annually. Only about 10% is generated by new buildings. The vast majority of CO2 emissions result from energy consumption of existing buildings - their lighting, heating, and cooling.
Investments in redevelopment projects will contribute materially to the reduction of CO2 emissions. The investments might be in single buildings or target entire town centres/neighbourhoods.
Our real estate team has introduced a notional carbon tax into our underwriting, making carbon an explicit item. The inclusion helps education, and supports our team’s “carbon fluency,” ensuring it is an everyday aspect of active investment management. It also ensures timely action and acute focus on the biggest contributors.
Opportunity number 4 – Natural capital
Carbon sequestration – actively reducing carbon in the atmosphere – is a crucial element of climate mitigation that will be needed in addition to carbon reduction efforts. Natural capital investments, particularly into forestry, are big contributors to carbon capture.
In terms of investment opportunities, investors may select single projects or funds that provide access to a range of projects on a diversified basis. The asset class is relatively young and there are a couple of barriers or pitfalls that need to be considered.
For example, certain projects may have significant impact, but the benefits of a cleaner river may not be felt by the investors. Another challenge is the ability to achieve impact at scale. Certain standalone projects are small, and it can be hard to deploy larger amounts of capital.
There are, however, specialised funds that will generate a robust return while making a positive impact. A specialist forestry fund might select and finance attractive forestry projects to generate additional returns via the sale of carbon credits. Carbon credits are a neat way to commercialise projects and give sponsors an exit route. The cohort of forestry funds, but also other natural capital funds is growing, and investments into funds like these benefit from a low or even negative correlation to most asset classes.
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