LPs warm to idea of climate investing as separate asset class

Speaking at SuperReturn Asia in Singapore last month, senior executives from PSP and Hamilton Lane said investors may consider allocating to climate strategies from a dedicated pool of capital.

PSP’s Simon Marc (second left): climate emerging as an asset class

LPs may consider climate-related investments as an asset class in their own right, a conference has heard.

Speaking at SuperReturn Asia in Singapore in late September, Simon Marc, senior managing director and global head of private equity at PSP Investments, said the institution was allocating substantial capital to climate investing.

“For people like us [ESG is] a very important driver of what we do anywhere from asset selection to monitoring the GPs we work with,” Marc said. “But increasingly as an investment theme in climate in particular, we’ve committed over a billion [Canadian dollars] just in the last year to climate strategies so this has really emerged as being almost an asset class in itself.”

Some $183 billion is either being raised or has been raised for climate-focused private markets strategies to date, according to research from placement agent Campbell Lutyens. Of this, $110 billion is dedicated to energy transfer, though strategies focused on carbon emissions or food, land and agriculture strategies have also attracted attention.

Investors though seem yet to reach a consensus on where climate-related investments should sit within their strategic asset allocations, or which pool of capital they should commit from, affiliate title New Private Markets reported in May. Though mainstream GPs have established distinct strategies for social and environmental impact, with these funds often structured as typical private equity, infrastructure, debt or real estate funds targeting market-rate returns, some investors have expressed interest in multi-asset or flexible capital funds.

Kerrine Koh, a managing director and head of Southeast Asia for Hamilton Lane, told SuperReturn delegates that climate investments should come from their own bucket.

“I would think that climate as well… does deserve a separate allocation, and I think that some of the challenges in that category are due to the nature of this market: it’s much more nascent, so there’s a relative lack of a track record,” she said. “I would actually propose or recommend for investors to look at impact funds as more of a diversified portfolio… across a few GPs… versus being very focused on one.”

Other major firms are also increasingly investing in climate-related projects. KKR closed its $1.3 billion Global Impact Fund in 2020 and identified climate action one of the vehicle’s four investment themes, as Private Equity International previously reported. Multi-strategy funds are also becoming more common in impact investing, with BlackRock’s $1 billion-target impact fund expected to invest in private equity, private credit, infrastructure, real estate and “other niche asset classes”, New Private Markets reported earlier this year.

Koh, who joined Hamilton Lane from BlackRock in September, believes the private markets are well-suited to ESG-focused investing.

“In the current climate, I think especially the energy crisis as you can see in the public markets arena, all the ESG funds have actually underperformed,” she said. “I definitely think that private market is uniquely positioned with this long-term patient capital to be actually investing into ESG and impact.”