Three trends to watch in responsible investment

ESG considerations in private markets continue to grow in size, scope and complexity.

Still top of mind: Climate

The proliferation of climate-focused strategies was one of the most notable sustainability trends in private markets last year. In late 2022, General Atlantic closed its first climate solutions fund, BeyondNetZero, by which point it had already invested more than $800 million in five businesses that aim to combat climate change at scale. It followed other notable climate fund closes, such as TPG Rise Climate which closed on $7.3 billion in April, and Brookfield’s $15 billion Global Transition Fund, which held a final close in June.

The trend looks set to continue through 2023. Goldman Sachs Asset Management is one of the first to throw its hat into the ring this year with the announcement of the final close of its inaugural Horizon Environment and Climate Solutions fund. The “growth-oriented” private equity fund will invest in climate transition solutions, including clean energy, sustainable transportation, ecosystem services, waste and materials, and sustainable food and agriculture. Despite a challenging fundraising environment, the fund gathered $1.6 billion, surpassing its initial $1 billion target.

Commenting on the market slowdown, Ken Pontarelli, GSAM’s head of sustainable investing for private markets, tells affiliate title New Private Markets that climate-focused strategies have retained their investor appeal: “If you think about where on the equity side clients are allocating capital, this is still high on people’s list. Obviously they are thinking about private credit, they are thinking about secondaries, but within the equity bucket, [climate-related investing] is still very, very topical.”

Indeed, some investors are now earmarking buckets of capital for climate investments. In April, for example, UK pension pool Border to Coast Pensions Partnership announced that its latest private markets programme – an allocation of £4 billion ($4.9 billion; €4.6 billion) – would include a dedicated £1.35 billion for private equity, credit and infrastructure investments that “will have a material positive impact on climate change and support long-term net zero carbon emission goals”.  

While climate-focused fundraising will likely remain a bright spot, it’s not all smooth sailing for these strategies. For climate impact funds in particular, measurement remains a complex issue. “There isn’t a one-size-fits-all approach. Different managers have different focus areas and are trying to solve different problems,” says Michael Viehs, a managing director and global head of sustainable investing at Partners Capital. “There will always be a bespoke element to climate reporting.”

Rising up the agenda: Nature

While climate is a top priority for many investors, there is a growing recognition that biodiversity should be part of the climate action equation. As Ellen de Kreij, lead adviser of the ESG practice at Apax Partners, tells New Private Markets: “Nature and biodiversity are intertwined with climate engagement in so many ways. It is very positive that biodiversity is now moving up the agenda as a topic [that] private markets investors should be focused on.”

Some GPs are ramping up their focus on nature by examining biodiversity impacts and risks in due diligence, or giving these issues greater weight when engaging with portfolio companies. Triton Partners, for example, is asking portfolio companies to report on a greater number of biodiversity and ecosystem-related metrics this year. “Many won’t have considered these before,” Triton’s head of sustainable investing, Ashim Paun, tells Private Equity International, “so some education is needed to ensure that we receive meaningful responses and can then help them to mitigate any identified risks.”

Meanwhile, others are launching dedicated strategies targeting nature-based opportunities. In July, for example, Schroders and Conservation International established Akaria Natural Capital, an impact manager focused on natural climate solutions in Southeast Asia. 

December 2022’s UN Biodiversity Conference (COP15) and frameworks such as the Taskforce on Nature-related Financial Disclosures have helped highlight the need for a more proactive approach to nature-related considerations.

“What I heard while at the COP15 conference evolved the way I think about this topic,” says Isabelle Combarel, deputy CEO, head of business development and ESG at SWEN Capital Partners, whose €150 million Blue Ocean Fund backs start-ups that support ocean health regeneration. “Now I believe that nature has to come ahead of, but be linked to, climate. If you focus just on climate, you may be having negative impacts on nature; if you focus on nature, you will have a positive impact on climate because biodiversity is dependent on climate.”

On the radar: Circularity

Closely linked to efforts to combat climate change and limit adverse impacts on the natural world is the premise of circularity. The circular economy model aims to reduce waste and make manufacturing and consumption more sustainable through the redesign, reuse, repair and recycling of products. The concept attracted some Hollywood limelight last March when venture capital firm Regeneration VC announced that actor Leonardo DiCaprio was an investor and strategic adviser to its $45 million circular economy fund.

“We need forward-thinking approaches that perform measurably better for our planet,” said DiCaprio in a press release. “It’s time for people to feel good about their purchases and for businesses to meet that challenge – every bite of food, every t-shirt, every product counts.”

Elsewhere, specialist circular economy investor Circularity Capital closed its second European growth fund on €215 million in April 2022 and Closed Loop Partners, a New York-based firm focused on the circular economy, announced the close of its debut buyout fund on $200 million in June.

While consumer demand is the main driver of circular businesses, growing regulatory pressure is expected to accelerate momentum in this area, says Mirtha Kastrapeli, executive director at analytics firm ISS ESG: “There’s definitely regulatory aspects that are encouraging companies to start introducing strategies that have circular-economy principles.” 

Indeed, the EU adopted a new circular economy action plan in 2020, which has recently seen it overhaul rules pertaining to packaging design and waste.