From Private Equity (PE) to fund managers and private banking, the investment community has a crucial role to play to help accelerate the transition to net-zero. Speakers at the recent BNP Paribas Sustainable Future Forum (SFF) explained: first, because climate change will likely affect their current investments, but also because the transition presents many opportunities in a fast-growing sector.
Climate change: a growing investment pool with many opportunities
The Changing Climate for Private Equity report published earlier this year by the NGO Ceres in partnership with The SustainAbility Institute by ERM, the world’s largest sustainability consultancy and a KKR portfolio company, highlighted that assets under management in the sector tripled between 2010 and 2020, and are expected to double again by 2025. “Private Equity has to be part of the transition story,” said Elizabeth Seeger, Managing Director, Sustainable Investing at KKR. “At KKR, this means two things: where we invest and how we invest.”
Private Equity has to be part of the transition story. At KKR, this means two things: where we invest and how we invest.Elizabeth Seeger, Managing Director, Sustainable Investing at KKR
Through its Global Impact strategy, the firm invests in companies whose core products or services deliver solutions to critical global challenges, including climate mitigation and adaptation. “Earlier this year, KKR also hired a group of individuals to focus on investing in energy transition opportunities within the firm’s infrastructure business. That team is actively looking to invest in renewable energy assets and companies that help provide solutions in renewable energy or transition activities,” she noted.
In terms of how KKR invests, Seeger explained it is about integrating climate considerations into the firm’s investment process, as well as helping portfolio companies understand how climate may impact their businesses. In 2021, KKR hosted a series of climate action webinars to provide portfolio companies with information, expert advice, and resources for understanding and managing climate risk. As part of this effort, KKR also educates companies on emerging and evolving disclosure expectations, including recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), which it supports. “We want to make sure ESG recommendations are integrated throughout our investment process and investment decisions. We take a materiality-driven approach – understanding the company’s industry, where it operates, who its stakeholders are, and making sure we are thinking about what’s relevant instead of taking a one-size-fits-all approach,” she stressed.
“One thing that has been important for KKR’s own journey is maintaining authenticity and credibility. While we’ve certainly made progress, there’s still work to do to make sure our activities in this area are driving real, tangible results,” she concluded.
Driving awareness and change in portfolio companies & investments
In a fireside chat at SFF, Stephen Bird, CEO of abrdn, noted that raising awareness and having visibility, or “high quality content that is appropriately described”, is key to help investors achieve the transition to net-zero. “abrdn is a signatory of the New Zero Initiative. There is a difference between carbon avoidance and investing in the transition to a clean economy.” abrdn created funds that have identified leaders: major companies investing in the pathway to green. With COP26 coming up, Bird think it is very important to recognise that the world is not on a path to net-zero by 2050. “The Paris Agreement Goals are well less than 2 degrees. Today, if you get every pledge you get to 2.4 C. This is the largest private, public and personal challenge,” he stated. Within its advisor business and the direct consumer business, abrdn is creating products and thematics to offer a participation towards net-zero at individual level. “There is not enough awareness of what action a person can take to invest in net-zero at a consumer level,” Bird pointed out.
abrdn is a signatory of the New Zero Initiative. There is a difference between carbon avoidance and investing in the transition to a clean economy.Stephen Bird, CEO of abrdn
Decarbonisation: the view from investors in Asia and emerging markets
ESG is top of mind for investors all over the world – including Asia, which is catching up with the general mood. “It’s becoming a very important part of our process,” said Jean-Eric Salata, Baring Private Equity Asia (BPEA) during a fireside chat at SFF. “We look at ESG both in terms of risk mitigation and also to build in our investments and create opportunities.” For mitigation, this means looking at the negatives, screening, performing due diligence, and ensuring investments meet the minimum required in terms of compliance. There are also sectors BPEA will – and will not – invest in.
“Beyond that, there’s also an opportunity to look at companies that are not yet compliant or partially and bring them up fully into compliance. That’s where PE can really be a force for good, driving companies to improve their overall standards – be they in the areas of environmental, governance or issue like diversity and employees. We really approach it in a comprehensive way,” Salata added. For instance, BPEA pivoted a manufacturing business in their portfolio towards supplying the electric vehicle supply chain in Asia. They also worked alongside BNP Paribas to issue Asia’s first sustainability-linked credit line used as part of their funding facility. “It’s very large, tied to certain KPIs linked to certain specific areas like diversity, the sustainability goals we have in our organisation and other ESG metrics.”
We look at ESG both in terms of risk mitigation and also to build in our investments and create opportunities.Jean-Eric Salata, Baring Private Equity Asia
For investors in Asia, the opportunities to invest in decarbonisation undoubtedly abound. “The expected returns from investing in low carbon businesses in Asia and emerging markets are higher than those of developed markets, simply because of the low starting base and starting point we are in in this region,” remarked Rachel Teo, Head of Futures Unit, GIC.
Frederick Teo, Managing Director for Sustainability Solutions at Temasek said they encourage their portfolio companies to pursue new investment opportunities in carbon-aligned, or carbon-positive or low carbon solutions, or other innovations such as sustainable alternative protein and clean energy. “Internally, we have set up a sustainability council with CEOs and major companies here in Singapore to share best practices and important messages to companies on sustainability.”
Lim Kim-See, Regional Director EAP at IFC agreed that Asia’s private sector is ready to do more. “In the last few years, we were able to push the boundaries and create new instruments to entice the private sector to take an increasingly significant role.”