Ask a private fund manager about ESG specifics, and they will probably start digging into carbon emissions or matters of diversity, equity and inclusion. These have understandably been priorities for both investors and managers and portfolio company data around these two themes is starting to be collected in earnest.
This is clear progress. But what comes next on the sustainability agenda? Sustainability-focused affiliate title New Private Markets has come up with six trends that will appear on the radar screens of private markets professionals this year.
1) Natural capital will become a mainstream proposition
If 2021 was the year that climate funds emerged as a private capital strategy, then 2022 may well be the year that natural capital does the same. A number of tailwinds are behind this: in May this year, the COP15 meeting will hopefully see the sign off for the Post-2020 Global Biodiversity Framework, an agreement that will seek to do for biodiversity what the Paris Agreement did for the climate crisis.
Then there is the need for entities of all shapes and sizes to offset carbon emissions. As Schroders’ global head of sustainability solutions, Sarah Bratton Hughes, writes for New Private Markets: “Investors should make specific allocations to private sector projects that establish, preserve, protect and enhance the planet – not just avoid the bad actors.” This new asset class will attract more corporates into the private fund space as limited partners.
2) GPs and LPs will focus more on human rights
In spring this year, the Principles for Responsible Investment will officially launch its collaborative human rights stewardship initiative. This will, reports affiliate title Responsible Investor, identify and engage with between 30 and 50 companies on human rights issues, such as implementation of the UNGPs and lobbying behaviour. It takes inspiration from the Climate Action 100+, the investor effort launched in 2017 to engage the largest corporate greenhouse gas emitters. While this initiative focuses on listed companies, private markets investors are also reporting investor pressure on human rights. We expect more.
3) Tax justice will rise up the ESG agenda
Investors are starting to pay closer attention to the tax practices of their investee companies and external managers. Danish pension fund PKA has begun to review its portfolio for companies paying insufficient corporate tax. Canadian pension fund CDPQ told New Private Markets that tax, and the imperative to pay a fair amount of it, had become a key point of negotiation between it and some of its investment partners. We anticipate more investors signalling an interest in tax as an ESG issue.
4) ESG metrics will go beyond credit facilities
In December, we heard how one private markets firm – InfraRed Capital Partners – had taken the idea of sustainability-linked credit facilities and applied it to other banking products. “We have taken that same basic mechanism and applied it to foreign exchange hedging and also to inflation swaps,” said Jonathan Beeson, an associate director at InfraRed Capital Partners. “If we hit these targets, we get a benefit across the fund in our various products with the banks. It is really taking one mechanism and applying it across several areas of risk management.” Expect more of this type of innovation.
5) LPs will take a thematic approach
With the emergence of impact strategies that span different asset classes, investors are thinking hard about how to allocate capital. According to two placement agents with experience of sustainability or impact-focused funds, most investors are still allocating capital from their existing asset class buckets, but bringing in the in-house sustainability resources to work with the asset class teams on due diligence. As the definition of “impact” evolves, institutional investors will focus on specific sustainability themes – with climate being the largest – and allocate capital to specialist managers in these spaces, regardless of whether they call themselves impact funds.
6) A record-breaking fundraising year
There can be no doubt that 2022 will set a new high watermark for private markets impact fundraising. Both Brookfield Asset Management and TPG have yet to hold final closes on their climate-focused funds, while Goldman Sachs, Apollo Global Management, BlackRock and Apax Partners are all in the market, seeking dollars for impact. And new entrants are popping up all the time.
Get ready for another big year in impact
Private fund managers are already at work to make 2022 a big year for impact capital raises.
As the global shift towards sustainable investing continues, the world’s largest private markets firms, as well as smaller and more specialised managers, are collecting large sums of capital earmarked for benefitting communities and the environment.
Although socially conscious investing, tackling themes ranging from diversity to human rights, is picking up steam, addressing climate change will remain at the top of investors’ priority list. From private equity to infrastructure and credit, managers are currently raising $183 billion to invest in climate solutions alone, according to Campbell Lutyens. Paula Langton, a partner at the placement agent, said climate strategies will develop even more in the venture capital seed-stage buyout space.
“Thinking about the fundraising market over the next six months… we are still seeing in investors’ allocations sustainability as one of the few new areas they’re continuing to deploy,” she told New Private Markets.
Some celebrated asset management firms are raising capital for impact-at-scale strategies. Alongside banner fundraises from TPG, KKR and Brookfield Asset Management, other brand name firms – such as Goldman Sachs, BlackRock, Apollo Global Management and Apax Partners – are marketing debut impact offerings.
These household names are joined in the market by a number of specialist managers. Nordic private equity firm Summa Equity achieved B-Corporation certification last year to invest in social and environmental causes with “purpose as well as profit”, and is raising its third flagship fund, targeting €2 billion. Alternative protein specialist Blue Horizon is planning to launch its next growth capital fund focused on investments in the food system and is targeting $750 million for its next vehicle.
Big-name backers have lined up behind private equity firm Trident, which is raising a $250 million inaugural fund with a focus on improving racial equity. The firm has secured investments from Vista Equity Partners founder and chief executive Robert Smith, Bank of America, Moody’s, and Brightwood Capital Advisors co-founder Sengal Selassie.