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. 

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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. 

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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.