october 2024
Private enterprise
Private markets are particularly well suited for sustainable investments – but require a specific skillset
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Sustainable investing in private markets – a new start?
It seems like every week there is an asset manager announcement around an acquisition or new product focused on private markets. This appears to be good news for sustainable investing, as we discovered in this PA Future private markets special, after a tumultuous few years of greenwashing concerns, backlash and underperformance. In our interview with Schroders Capital, we hear how impact and sustainable investing began life in private markets, and where there is an abundance of investment opportunities continues to grow. Further, Downing’s Q&A tells us how engagement can be more meaningful in terms of social and environmental outcomes when investing in private markets. We need to consider, however, that investing in private assets requires a specialised skillset – something which is explored in this issue’s cover feature. There has been many a bandwagon hastily jumped on by asset managers over the years but, as is highlighted in our fund selector slot by Patrick Thomas, the move into private markets appears, so far, to be well-considered with resources dedicated to technology and, of course, acquisitions. This is the first time we have dedicated an issue to private markets, but, with the increasing investment universe from a sustainability perspective and consistently growing investor appetite, it may not be the last. If you have any feedback on this issue or our private markets coverage, please get in touch at natalie.kenway@markallengroup.com
Spotlight
COVER feature
Private markets are particularly well suited for sustainable investments but before public market clients dive in, writes Michael Nelson, they should be aware this area requires a specific skillset
Also in this issue ...
Downing’s Roger Lewis speaks to Natalie Kenway about an abundance of ESG opportunities within private markets
‘My challenge is proving ESG makes money’
With nearly 800 million people lacking access to clean drinking water, private capital will play a key role in providing viable solutions, writes Praveg Patil of M&G Investments
Bridging the water gap
ED’s letter
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Natalie Kenway Contributing editor PA Future
Q&A
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Maria Teresa Zappia, head of sustainability and impact, tells Natalie Kenway how Schroders Capital is shaping the future of sustainable finance through private markets
The shape of things to come
interview
As private markets are gaining more investor appeal, CGWM’s Patrick Thomas looks at the pros and cons versus public markets
Where ESG meets private equity
fund selector comment
Private market investors are realising the potential to ‘unlock social and financial change’ through gender-lens investing
Gender-lens investing in the private sector
analysis
Although Schroders Capital was only officially formed in 2021, some of the teams that make up the business – which has grown organically and through acquisition – have operated for more than 70 years, Schroders Capital’s Maria Teresa Zappia tells PA Future. It would be fair to say they have the expertise of investing in private markets where, she says, investing in sustainability and impact truly began. “It’s clear there are huge opportunities in private markets overall, but due to the extended investment horizon and ability to shape the investment process, this is really where impact and sustainability investment started,” the head of impact and sustainability notes. Zappia herself joined the company through acquisition and is also chief impact and blended finance officer and deputy CEO at BlueOrchard Finance, a company specialising in impact investing in emerging markets, which Schroders acquired in 2019 in an expansion into private markets offerings for its clients. This was followed up with the purchase of 75% of the shareholding of Greencoat, a European renewable energy investor, in 2021 before the businesses were combined to create Schroders Capital. Today, the company has some $100bn (£74.7bn) in assets under management allocated across investments within private equity, debt, real estate and infrastructure, indicating the level of growth in this asset class but also the firm’s commitment to impact investing. “There is immense potential to shape strategies that address both environmental and social challenges [in private markets],” Zappia explains. She points to examples of BlueOrchard’s focus on financial inclusion and Greencoat’s investments in solar and wind energy, while Schroders’ UK Real Estate Impact fund, which prioritises social housing in deprived UK regions, also makes a positive difference through private investments, she says. Watch the video interview with Zappia for more on the establishment of Schroders Capital and embracing sustainability.
There is immense potential to shape strategies that address both environmental and social challenges in private markets’
Maria Teresa Zappia, head of sustainability and impact, Schroders Capital
Demand has prompted acquisitions Appetite for private markets has increased exponentially in recent years. Private assets constitute a much larger market than public assets and offer potentially higher yields, diversification, and in cases such as real estate, a hedge against inflation, making them popular in a post-Covid market with heightened geopolitical tensions. Asset managers have taken note and have either acquired established businesses in this area, like Schroders, or sought to establish teams and products organically. But Schroders’ early acquisitions meant the group was in the unique position of launching the first Long-Term Asset Fund (LTAF) in 2021. These are regulated open-ended investment vehicles introduced by the Financial Conduct Authority to enable a broader range of investors, with longer-term horizons, to invest efficiently in illiquid and private assets. Schroders now has two LTAFs – Climate+ and Renewables+ – and has plans to launch a UK venture and growth LTAF investing in UK science and tech companies after being awarded £300m by the British Business Bank and Phoenix Group. “The democratisation of private assets is a big thematic area for Schroders Capital. We have moved from the typical investors in private markets, that are generally institutional investors with long investment horizons, to family offices or alternative types of investors, and potentially retail investors.” With LTAFs, she adds, the firm has been able to create these “semi-liquid strategies” that are 80% invested in private markets and 20% in listed equity, which has “really opened up the floor” in terms of the investor audience. In turn, access to the sustainable and impact opportunities are opening up, and Zappia adds private markets is an area where investment firms can really have a high impact through their investments. She points to the firm’s UK Real Estate Impact fund, which focuses on tier two UK cities and social housing in deprived areas. “We’ve received the Sustainability Impact label [under the new Sustainability Disclosure Requirements fund labelling rules] for this strategy, which underscores our commitment to addressing social housing needs while maintaining rigorous impact KPIs.” Growing and competitive space Despite the rich history at Schroders Capital, Zappia also explains how private markets impact and sustainable investing is in its relatively early stages with the investment universe being “quite narrow”. However, she adds, it is “absolutely growing”. “The challenge is if you are really embedding sustainability and impact into your investment process you may find yourself with a sometimes-restricted investment universe. However, you have a highly impactful portfolio, and that isn’t really comparable to market trends.” In an increasingly competitive space, the firms that dedicate investment in this area will be the ones to thrive. Schroders Capital seems to be one step ahead. It has the teams’ history and experience, impact tools such as SustainEx and Context – which Schroders Capital developed to analyse hard-to-measure impact metrics – and continues to dedicate investment into this area. For example, Zappia also comments on the firm’s development of artificial intelligence analysis for due diligence and administration. Schroders Capital is well positioned to remain a key player in shaping the future of sustainable finance in private markets.
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Click here to read Maria Teresa Zappia’s biography
Maria Teresa Zappia is the head of sustainability and impact at Schroders Capital. She has led BlueOrchard’s impact team since 2018 and having been part of the BlueOrchard management team since 2008. At Schroders Capital, Maria Teresa leads all sustainability and impact-related activities across private asset themes and asset classes. At BlueOrchard, she is responsible for the Public Private Partnership funds under the firm’s management and impact practice. Prior to joining Schroders, she held positions at the European Bank for Reconstruction and Development, and the Asian Development Bank.
The private investment market has steadily grown over the past 10 years, with investors chasing diversified returns and hedges against an increasingly volatile public market. This has been all the more apparent recently, with the global economy still reeling from the Covid-19 pandemic, increased geopolitical tensions across the globe and interest rates spiralling upward. As a result, sustainable funds typically underperformed traditional counterparts due to their lack of exposure to fossil fuel energy, at a time when so many worried about energy security, and flows have also suffered. However, the sustainable investment landscape adapts and evolves at a fast pace. Additionally, private markets are particularly well-suited to sustainable investing, as fund managers have direct ownership and control over the assets they hold. This provides abundant opportunities for engagement. Further, the long-term nature of the types of assets typically featured in the private markets are ripe for decarbonisation, such as within infrastructure where there are airports, toll roads and seaports, notes Maria Nazarova-Doyle, global head of sustainable investment at IFM Investors. “The ability to take a long-term view, coupled with direct control over assets, makes private markets an investment of choice for asset owners focusing on sustainable and impact investing as it allows them to directly influence sustainability outcomes compared with public markets. This approach has particularly been effective in sectors critical to the energy transition and addressing climate change, such as renewable energy and green infrastructure,” she explains. A distinct skillset However, investing in private markets requires a distinct set of skills and expertise compared with public markets. This includes a deep understanding of specific asset classes (eg infrastructure, real estate, private equity) and the ability to assess the long-term potential of these assets in generating risk-adjusted returns. For Nazarova-Doyle, the key sustainable investment competencies for those working in private assets include conducting thorough assessments of environmental impacts, social implications and governance structures, utilising risk assessment frameworks to identify and mitigate social and environmental risks, including the regulatory environment the asset operates in, and keen negotiation skills, especially for structuring deals such as power purchase agreements for renewable energy, which require specialised knowledge of financial and technical aspects. Tycho Sneyers, managing director at LGT Capital Partners, goes further. For him, an intrinsic knowledge of cashflow measurement and the metrics involved are important aspects of being successful in the private market space but, perhaps more importantly, forming relationships with the best managers is the key. “In the private equity space, success comes through people getting to know who the best managers are and forming a relationship with them because the very best managers – those that have no difficulty raising capital from existing investors – tend to be oversubscribed most of the time. “If you’re a new kid on the block and you want to invest with these managers, you need to hire people who already know who those people are and, ideally, have already formed a relationship with them. That’s a really big challenge.”
The ability to take a long-term view, coupled with direct control over assets, makes private markets an investment of choice for asset owners focusing on sustainability and impact’
Maria Nazarova-Doyle, global head of sustainable investment, IFM Investors
Data requirements and transparency There are also marked differences in terms of data and reporting. Private markets have often had a bad reputation for the lack of transparency of information, typically involving less regulatory oversight and public scrutiny compared with public markets. This means there is often greater flexibility in how information is disclosed and reported, explains Nazarova-Doyle. However, Pollock asserts the information on an investor’s private investments is very good – it’s just not made publicly available. This places a greater responsibility on investors to ensure robust reporting practices are in place, especially when it comes to sustainable investment outcomes – and they can access them. “In private investing, you own and operate the companies or the assets you have. There is better access to data than you would have on the public side, because you own and know what to collect and how to collect it. “On the public side it is systematised and standardised data, which means they’ve been able to get up to speed faster on portfolios. On the private side, because of the fragmentation by industry, by manager, by geography list or by any of the various criteria, it’s been tougher. “But at the same time, because you’re owning and operating these assets, the ability to be more sustainable and more impactful over the longer term is another one of the big benefits of the private investing universe.” That hasn’t prevented the regulatory environment for private assets evolving quickly and demanding more disclosure, particularly when it comes to sustainable investment. Sophisticated private market investors are developing comprehensive reporting frameworks that capture the impact of their investments on environmental and social factors, as well as governance practices. The result of this is the ESG Data Convergence Initiative (EDCI), founded in 2021 by a group of limited and general partners frustrated at the lack of performance-based data from private companies. The goal is to “create a critical mass of meaningful, performance-based ESG data from private companies by converging on a standardised set of ESG metrics for private markets,” allowing general partners and portfolio companies to benchmark their current position and generate progress toward ESG improvements, while enabling greater transparency and more comparable portfolio information for limited partners and investment managers. In July 2024, EDCI said it had gathered over 120,000 data points from 6,300 portfolio companies spanning 75 different countries and 76 industries aligned with the Sustainable Accounting Standards Board. A more mature market As to whether the private market space will continue to see growth, Pollock says she “drank the Kool-Aid a long time ago” and can only see continued expansion from here. “Private markets used to be classed as ‘alternatives’, but what we’ve seen over the past 10 years is a maturity of the market and it has become so embedded within the largest portfolios and with the largest investors – there’s only one direction to go from here.” Those seeking to pivot to private from public market investing successfully should ensure they have the right talent and capabilities in place to effectively manage their investments. The message from private market investors seems clear: underestimate the differences at your peril.
cover story
It’s a person- to-person type of business. At the end of the day, you place your trust in someone doing what they say they’re going to do’
Emily Pollock, co-founder of private asset solutions, Schroders Capital
Private climate funds concentrated in high-emitting sectors Asset-weighted sector exposure %
Source: MSCI, data as of 30 September 2023
Investors need to bear this in mind when choosing which private markets solutions to allocate to, and Emily Pollock, co-founder of private asset solutions at Schroders Capital, agrees. She says to start in the world of private market investing, investment managers should work with an adviser or experienced professional. Although you can upskill to a point, “part of the beauty of private markets is that it’s fragmented” and “it’s not like you can go online and look at a database”. “What I love the most is it’s a person-to-person type of business. At the end of the day, you place your trust in someone doing what they say they’re going to do. A limited partnership agreement, for example, is literally a pledge to provide a certain amount of money to someone to spend however they see fit. “That important trust element though means meeting the universe of managers is important to identify who else is out there and who’s competing, getting to know them, getting to understand what they’ve done in the past and also what they’re going to do in the future. “I’d suggest, in the case of switching from public to private, an investor would first need to start with carving out part of their allocation and building a portfolio, working with a manager who can help design a portfolio that has proper diversification and a plan of action to avoid severe concentration risks.” Additionally, Pollock notes a rise in the need for specialisation. Gone are the days, she continues, where someone could perform the role of a generalist – specialising in either a region or sector, or the type of deal, with operational know-how is crucial. The shift in hiring practices, as a result, has been noticeable, says Nazarova-Doyle, with firms seeking individuals that combine deep expertise in private markets with experience in sustainable and responsible investing. This includes professionals with a strong background in infrastructure, private equity and real estate, who can bring valuable insights into managing assets with a long-term, sustainable focus. “In particular, this trend is starting to take on in Defined Contribution (DC) pension funds as they grow their holdings across the world and become very large and sophisticated investors. More and more DC pension money is invested in private markets and these funds need to have internal expertise to be able to either select the right asset managers, build the right strategies or even manage private assets directly,” says Pollock.
Fomo, the fear of missing out, is probably the fund investor’s worst enemy. If there is a bandwagon, investors will jump on it – frontier markets, cryptocurrency, Chinese consumer tech, the metaverse, AI – even ESG – there is always a new trend in markets that investors feel they are missing out on. Today perhaps, we can add ‘private markets’ to that list. Investors can see the amount of money that was being made pre-IPO when they look at the ‘magnificent seven’ and other tech giants, and they now want in on the action. Even though this strategy went a bit awry when inflation ticked up, interest rates along with it and the cost-of-living crisis hit us all – the cost of borrowing soared, which hit private companies hard. This pushed a few companies to go public, but a lot of IPOs didn’t work out and companies fell below their IPO price. As inflation drops and interest rates too, private markets are beginning to look more attractive again. But one problem is that not a lot of companies want to go public these days. They are happy to stay in private markets for longer – take Space X – Elon Musk is in no rush to float the company. For investors this is a conundrum – the options to access these companies is limited and can only be done through specialist funds or investment trusts, which have access to private assets, or to participate through illiquid specialist private asset structures. Making an impact For investors, the question is, how do you play ESG in private markets? It’s not straightforward. Can you make the biggest ESG impact through public or private investing? A lot of ESG investors want to make an impact – they want their money to positively impact climate change or society, so they want to give money to the companies that are making a difference. And you can do that directly when the company is privately owned – buy the sustainability equivalent of Space X and the company gets the money, so you’ve made a difference to a problem you care about. As soon as they are listed, you are buying shares from another investor – you aren’t giving money to the company directly. You aren’t really ‘changing the world’ through your investments – you are just aligning your portfolio to your values. Of course, companies can and often do raise capital on public markets and investors can choose to participate in this capital raises to fund new projects etc. Investors can also engage and vote with their feet when investing in public companies. You can attend AGMs and speak directly with the board. For example, Canaccord often engages with the direct equities it owns for clients and through third-party fund managers to ensure they’re focused on fiduciary duties and voting/engaging appropriately in line with our expectations. ESG investing in private markets – what’s the catch? There are quite a few. For a start, many of the best companies focused on sustainability orientated products and services tend to be publicly listed (water management companies, utilities, healthcare etc), so there is a more limited accessible choice. Secondly, sustainability themes tend to require a lot of long-term investment – think hydrogen power, AI, oncology drugs – the private market now has a very different funding environment and borrowing costs have risen sharply in recent years. Another issue is private markets are by their nature private. Transparency requirements are less onerous than in public markets. It’s difficult to look under the bonnet to see what they are really doing, and this can cause problems for investors looking for sustainability focused data. This can be problematic when you’re trying to figure out how well, or badly, a company is doing from a performance or a sustainability perspective. The ‘haystack theory’ applies when investing in private markets – for every Space X (successful, high growth) you invest in, there will be 10 or 20 that fail. The lack of transparency means that if a company is approaching IPO, you don’t have as much scrutiny over how strong either the investment or sustainability case is – and if you do have an inkling it won’t end well, there is only a small, illiquid market to offload your shares. Private – in and out of favour Of course, risks like this tend to materialise quickly and investors got a brutal awakening a few years ago when it became apparent lots of private companies were going to struggle. The narrative rapidly changed to ‘just buy the S&P’. Some sustainability funds with private company exposure were hit badly. We think there are less extreme ways for investors to make a sustainable impact through their fund choices than only investing in private markets. Here are some points to consider: ESG in the public markets. You can achieve your sustainability goals by buying public market stocks. Ultimately if everyone demands ‘impactful company’ stocks, these companies should see a lower cost of capital. That does have a small impact on their investment choices. So traditional impact products in public markets are still very relevant. Don’t ignore the bond markets if you want to make an impact. Lending money to companies or governments to fund impactful projects is theoretically a direct transmission mechanism. Investors should use it. Renewable infrastructure. Finally, we have areas like renewable infrastructure accessible via listed investment trusts. These trusts finance initiatives that help alleviate sustainability problems. Investors can support these when they come to the market for capital. As awareness of ESG and the drive to sustainability and net zero grows, there is no doubt that private markets will be a necessary part of the response to the challenge – environmental and social factors should attract investor demand for private assets. So in reality, there should be space for both public and private ESG assets in portfolios.
Patrick Thomas Head of ESG investing, Canaccord Genuity Wealth Management
Transparency requirements are less onerous in private markets. It’s difficult to look under the bonnet, and this can cause problems for investors looking for sustainability focused data’
‘My biggest challenge is to prove ESG makes money’
Downing’s Roger Lewis speaks to Natalie Kenway about an abundance of ESG opportunities within private markets, enforcing COP29 commitments and nature as a ‘mega-trend’
How long has Downing been investing in private markets, and how has that evolved over the years? Downing is quite an opportunistic business. We started investing in renewables 10 years ago, as they were booming at the time. It was the same for real estate six or seven years ago, and private equity before that. Three-quarters of our assets are invested in private markets and 25% is in listed equities and stockpicking fund managers. Even within those there’s a focus on small companies, which operate more like private markets. For example, a private equity-backed company with five to 10 people that has only just listed. They are typically small companies either listed or privately held, and focused on renewable energy and real estate. Are private markets an area where ESG opportunities are more abundant than they are in the listed market? Yes, they are. Look at renewables – there are definitely more ESG opportunities there. Last year at COP28, when there was a lot of talk about nationally determined contributions (NDCs), the UK said it wanted to reduce its emissions by 68%. That’s going to be through renewable power – wind, solar etc. The EU committed to 55% emissions reduction and there is also the International Energy Agency saying the future is solar. There are billions of dollars being invested in solar and the capacity keeps increasing. It’s the number one investment. Can you share some success stories? Let’s look at private equity within private markets, because there is a huge positive in that if you own the company, you can influence them. If you own half a percent or 1% of a listed company they don’t care, whereas if you own 90-95% whatever you ask for they’re going to do. Successes there are through encouraging companies to report on emissions. The UK, as mentioned, wants to reduce its emissions so companies will need to reduce their emissions as well, as the starting point is always data. What’s your carbon footprint? A lot of private equity companies have no idea what their carbon footprint is. They ask us ‘what are you talking about?’. We explain it’s your Scope 1 and 2 emissions, your greenhouse gas protocol. Because we’re the majority equity investor we can then ask them to provide their utility bills, as we have a platform that calculates greenhouse gas emissions. When we have their baseline – let’s say it is a carehome operator or special needs school in the southwest of England and their building emits 1,000 tons of carbon – that’s your start point. That’s our partial success as we now have the footprint and something to improve on and reduce over time. We can then talk about green capex and making the building more efficient. What materials are you using? Instead of knocking a building down, can you keep the steel and the structure? All that reduces the emissions. Say they have reduced from 1,000 tons to 500 tons, whatever they’re left with can be removed from the atmosphere by planting trees or buying carbon offsets – that’s how you get to net-zero carbon. We are setting them on the path to 2030. 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. We are seeing lots of groups entering private markets for the first time – large asset managers acquiring business, for example. What is driving the appetite for private markets, and what do investors need to consider? You always need to look at it externally. If you’re standing still, you’re falling behind – not just for ESG, but in life in general, as the world is moving forward. You need to be aware of external developments like nature, that’s been a big theme this year. The climate COP (COP29) is coming up in November and COP16 on nature is in October. We have had extreme weather, geopolitics, such as the Inflation Reduction Act and the UK shutting down its last coal plant – all these are linked to massive themes and any business should be aware of them. It’s not just about ESG – you could call it geopolitics, climate change or mega-trends – but you should always be looking externally to avoid falling behind. What do investors need to consider? I think it’s a credible approach and explanation of how a team integrates material factors when they invest. If you’re buying private equity or a solar farm, what are the material ESG factors? Then, be an active owner, have a dialogue about sustainability after you’ve invested. There is also reporting and transparency, speaking to media outlets or doing sustainability reports in line with climate disclosures as well to hold ourselves accountable. I think that’s what investors need to be considering – the internal and the external [to their business]. What do they need to think about in terms of liquidity? It’s similar to the point mentioned on valuations. Does ESG impact valuations? If you’ve got a stranded asset, such as a warehouse full of coal, and the UK is shutting down its last coal-powered plants, soon nobody’s going to want that warehouse full of coal. I can’t sell it, I can’t use it, I can’t insure it. What do I do with it? There’s no liquidity there. I think liquidity and valuation are closely linked, and ESG probably does impact them. You have mentioned TNFD and Downing has processes and tools for assessment of nature. This can be difficult to measure but why is it so important? I will reiterate it is about looking externally first and then responding internally. I think everyone should be considering nature. This is land use – how degraded is the land across the world? Think about the pesticides and the fertilisers that have been sprayed for mass-intensive agriculture. It’s good because we now have eight billion people around the world that are well fed, but at the expense of truly damaged ecosystems. The big thing for me with nature is that companies rely on ecosystem services. We’ve engaged with a few companies in listed equity around nature disclosures, and they need nature as they need water or they need carbon captured from the soil. There are so many systems they rely on, and therefore, if they haven’t got access to those ecosystem services, they can’t operate their businesses – nature regulates or provides inputs they need. We see nature as a mega-trend that is closely linked to climate. If you damage nature, you cause climate change; if you fix climate, you can fix nature as well. That’s why we see nature as an asset, and we’re starting to report on it more and more. There are new rules from Defra (Department of Environment, Food & Rural Affairs) that state you must achieve a gain in the local biodiversity of at least 10%. Imagine you achieve a gain of 50%, then you’ve a surplus of 40% and maybe that becomes a credit, like a carbon credit or a nature credit, which you can trade like a financial instrument with a value. Again, that’s the theory, but there are multiple reasons why nature is a financial opportunity. Another metric that’s difficult to gauge in terms of investing for impact. How do you measure that in private markets? We borrow a lot from public markets. The criticism of ESG is that it’s not had any impact yet. I’ve mentioned before how degraded nature is, or how climate change keeps getting worse. I think there is definitely a need to show how you’ve had a positive impact as well. Transparency is important and so is ESG reporting. We encourage companies to not make claims such as, ‘We’re amazing, we’ve had lots of impact’. Just be authentic and present the facts. There are universal metrics you can use, such as greenhouse gas emissions or science-based targets, and then there are also sector-specific metrics for impact, such as deforestation, coal or human rights benchmarks. Even though some of these are designed by NGOs for large public companies, you can take those concepts and apply them to private market investments. Last year at COP28, we saw a lot of focus on unlocking private capital and deploying that in emerging markets. Do you think we’ll see more at COP29? There are always these big commitments with big numbers, and they’re never met. Who enforces them? It’s not like the UN can send in an army and say ‘You have pay up’. It is a bit frustrating. So my focus is mainly on accountability. How do you actually have countries and companies commit to these goals and how are they going to be enforced? Do we have, for example, legally binding emissions reductions? It’s a tough one.
There are billions of dollars being invested in solar and the capacity keeps increasing. It’s the number one investment’
Roger Lewis, head of sustainability and responsible investing, Downing
Click here to read Roger Lewis’s biography
Roger Lewis is head of sustainability and responsible investing at Downing. He provides expertise and problem solving around ESG across the £1.9bn investment firm. Areas of focus are designing and implementing strategy and governance, integrating ESG into investment and engagement activity, driving advocacy through involvement with various industry associations and defining solutions to meet the future liabilities that clients are saving for today. Roger previously worked as head of ESG at investment manager and consultant River and Mercantile. Responsibilities included aligning ESG strategy to investment and client teams, stewardship to achieve real-world outcomes and providing specialist climate and carbon expertise. Prior to this, he held an ESG role at Aviva Investors Real Assets platform, which invests in property, infrastructure and private debt. Roger has completed the UN Principles of Responsible Investment programme, holds the CFA UK Diploma in Investment Management (ESG) and has passed Level 1 of the Chartered Financial Analyst programme.
Mainstreaming gender-lens investing in the private sector
Private market investors are realising the potential to ‘unlock social and financial change’ in the various approaches to gender-lens investing. Holly Downes investigates
Gender-lens investing (GLI) is a relatively new area in the investment space – there is a small but rising number of funds that take into account gender-based factors across the investment process to drive progress towards gender equality, and enhance returns. Interestingly in private markets, however, is how this is being adopted by not just gender-focused funds but also wider strategies focused on climate change and/or developed and developing markets. GLI has grown by 30% in private markets over the past two years, according to research by 2X Global, and many predict further growth. But how exactly does this work, and how is it having an overall positive impact on gender equality? Gender-lens investing explained 2X Global, a membership organisation focused on driving capital towards ‘gender-smart’ investments, defines GLI as the integration of gender analysis into a new or existing investment process for better social and financial outcomes. For example, these investments focus on providing women with leadership opportunities, quality employment, finance, enterprise support and products and services that enhance economic participation and access. The organisation also created the 2X Criteria, a global industry standard for assessing and structuring GLI investments. This contains six themes for investors to consider: leadership; access to capital; workplace equity; products and services; gender justice; and women as investors. According to 2X Global, these themes target areas where gender inequalities exist and work to enhance diversity at every level. The firm’s research also demonstrates how GLI is increasingly on investors’ radar as they understand its part in uncovering hidden potential risks. For example, companies that show no evidence of working to reduce their gender pay gap are at higher risk of losing more women over time. These losses – likely women with the skills and resources a company values – can lead to an overall decrease in talent and diversity, which is therefore correlated with the company’s performance. Companies are 27% more likely to underperform on profitability if they fall into the fourth quartile for diversity, equity and inclusion (DEI), according to McKinsey & Company. GLI in private markets Although private markets are showing progress in GLI, and there is a $6.2bn investment opportunity in funds that actively raise capital for GLI in private markets, according 2X Global, this has not always been the case. Liebe Jeannot, programme manager at 2X Global, says public markets have been ahead of private markets for some time as “data is more accessible in the public domain than private markets”. For example, investors can easily access a company’s Gender Pay Gap Report – in most cases – on a company’s website. However, since the early 2000s, the private market has experienced exponential growth in GLI despite the tough fundraising environment. The size of the market has increased 1.7 times to $13.6bn, according to the 2X Global report Project Catalyst: tracking gender lens investing activity in private markets. Project Catalyst, a collaboration between 2X Global and Sagana, a climate and gender lens advisory firm, has played a part. It was set up to expand GLI in private markets and highlight the increasing maturity and sophistication in gender-smart investment approaches. Some $33.6bn in gender lens investments have been mobilised under the 2X Challenge since the G7 Summit in 2018. GLI as mainstream If this growth in GLI in private markets continues, it is possible it will become mainstream with all private market investors integrating factors into their investment frameworks as they recognise the risk mitigation and boosts to equality. Muller agrees: “GLI will be mainstreamed as nearly all investors will perform a gender lens related due diligence.” Further, Raya Papp, founder of Sagana, adds: “We can now say, with a high level of confidence, that investing in women yields outsized financial and social returns.” And that is an outcome all investors in the sustainable space strive for.
We can now say, with a high level of confidence, that investing in women yields outsized financial and social returns’
Raya Papp, founder, Sagana
Click here to read about different styles of GLI
With nearly 800 million people lacking access to clean drinking water, individual goverments cannot tackle this crisis alone or deliver the financial investment needed. Private capital will play a key role in providing viable solutions
For millions of people across the world, access to clean water remains a distant reality. With the UN highlighting almost 800 million people lack basic drinking water, this crisis impacts health, dignity, social inequality and economic development. Factors such as demographic and climate change ensure this problem will only get worse. There are also political ramifications; 10% of the growth in global migration has been directly linked to the water deficit. Addressing this issue requires financial investment as well as creative thinking, and private capital will likely play a pivotal role. A perfect partner It is widely accepted that governments alone are ill-equipped to deliver either the scale or financial investment required to close the gap in global water provision. To be able to provide optimal, efficient and viable solutions, an inclusive approach needs to be adopted that involves governments, global agencies and, most importantly, enterprises (private and public, large and small). The intrinsic attributes of private markets align well to these challenges. Providers of private capital (equity and debt) often have a long-term investment perspective consistent with the long-term nature of large infrastructure projects and adoption of new technologies. Additionally, the typical return profile from large infrastructure investments, such as water provision, in terms of delivering dependable, regulated and often inflation-linked income streams may be highly attractive. Private equity has traditionally been an early investor in nascent or transformative technologies – likely a key requirement in tackling the ‘water gap’. However, the role of private capital is not limited to simply delivering attractive returns to investors – it can play an equally positive role in helping enable positive social change. Making a positive social impact The importance of secure, widespread water availability is not limited to the obvious provision of drinking water. It is essential to meet wider social, economic and political issues. The impact of water scarcity disproportionately impacts women and children. With private capital acting as an enabler, wider access to water can mitigate socioeconomic inequalities, empower communities and promote education, health and economic participation. Perhaps less obvious is the power of investment in water-related infrastructure to lessen pressures often arising over water rights and access in water-scarce regions of the world. New infrastructure, such as the construction of cross-border water management facilities can lower tensions between competing parties, and also play a part in encouraging water-sharing agreements between nations and within regions.
Praveg Patil Head of Asia Pacific, impact & private equity, M&G Investments
With private capital acting as an enabler, wider access to water can mitigate socioeconomic inequalities, empower communities and promote education, health and economic participation’
Water infrastructure Aside from the positive social impacts noted above, one of the wider attractions for investors in private markets is the breadth of opportunities available that seek to increase global water availability. By developing and maintaining infrastructure such as desalination plants, water purification systems and smart water networks – we can improve the quality and efficiency of water supply. For example, M&G’s private markets strategy Catalyst recently supported India-based Livpure’s latest capital raising exercise to increase production of its affordable water purifier business. According to The World Health Organisation, 70-80% of India’s disease burden stems from contaminated water. With the help of investment, Livpure will be able to expand its affordable water purifier rental model, bringing significant health and economic advantages to the Indian population. Private capital can also often serve as a driver of technological innovation, key to reducing water waste and improving water efficiency. Breakthroughs in water recycling, precision irrigation, cooling system technologies and leak detection are essential to managing the growing demands on water resources. When considering the universe of available investments, it is important to recognise that the water gap is not a problem exclusively for households and individuals. Quite the contrary in fact as 90% of fresh water is consumed by agriculture and industry. This presents investment opportunities not only within the B2C sector but more broadly encompasses B2B and B2B2C. A growing focus for private equity investors, particularly those with impact growth equity mandates, is that ‘clean water’ is now a clear investment thematic. As an investment theme, this will require sustained participation from private market investors over several decades. Encouragingly, this can be a ‘win-win’ scenario – attractive long-term sustainable returns for investors and a catalyst for essential capital to support the narrowing of the current water gap.
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Case studies: Livpure and Gradiant Current investments of M&G Investments – Catalyst strategy
