And on to private equity investors… Last week, I wrote about JPMorgan taking a hard line business view of transition economy investments to ensure they stay within “fundamentals of financial logic”. Perhaps unsurprisingly, private equity firms are in the same boat, although they are looking at how sustainability impacts exit strategies. Here is an interesting quote from an interview with Roger Lewis at UK investment and private equity firm Downing:
“The debate around whether investing sustainably can mean sacrificing returns has come up again recently. What’s your stance on that?
It always comes back to returns. We are fund managers, we’re not charities, we’re investment-seeking investors, so we always want the return.
One of my biggest challenges is to prove that ESG makes money. For example, if you’ve got a building that’s energy efficient, it’s green and is creating lots of jobs – there’s goodwill there as the community likes it, it’s recruiting local people and customers want to buy the products. And you can imagine a company or business like that making money more than one that’s polluting or dirty – they’re the ones being left behind.
To prove the point and not just talk about it in theory, we then have to ask how much money is it going to make? How does it contribute to our investment rate of return? It’s not easy to quantify it. For example, what’s the impact of evaluation at exit?
Last year, we were looking at selling some schools to another investor, and their investment approach was similar to ours. They had the same signatories, such as the UN PRI, they had ESG policies and ESG people, and they liked everything we did for ESG. But in terms of actually quantifying that to the valuation at exit of a company, I don’t think that’s there yet, I am not sure if anyone’s cracked that.”
Bloomberg highlighted the importance of private markets in the transition economy and expectations about returns:
“Investors seeking to generate returns by plowing money into the energy transition would be well-advised to focus their attention, and dollars, on private markets. That’s according to new research from MSCI Inc. During the past five years, a sample portfolio of investments in private companies that touch aspects of renewable energy, electric vehicles and energy storage generated cumulative returns of 123%, which compares with 57% for a similar portfolio of publicly traded companies…
‘Private funds’ relatively long holding periods of assets may allow investors to identify growth opportunities, optimize operations and capitalize on long-term, low-carbon trends – a few factors that may maximize exit valuations,’ [Abdulla Zaid, vice president at MSCI] said.”
More and more, it’s obvious we’re past the point where soft dollar benefits and intangible values of ESG/sustainability are persuasive – or perhaps tolerated. This poses meaningful challenges to ESG/sustainability leaders, staff and advisors not prepared to build a hard-dollar business case for their initiatives, programs and work. Much has been written lately about soft skills that ESG/sustainability professionals need to be successful, but there hasn’t been enough emphasis on the need for business acumen and skepticism – which can’t be ignored. Especially if private equity interest continues to grow.
Members can learn more about the business value of sustainability here.
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