- Private client interest in ESG strategies is rebounding on the prospect of improved performance.
- Private capital is the natural vehicle for impact investing.
- Focus areas include agriculture and the energy transition.
- The trillions of investment needed in the coming decades offer long-term opportunities for the private capital industry.
Private client interest in environmental, social and governance (ESG) strategies is once again on the rise, fuelled by expectations of improved performance as the global economy recovers, a recent Financial Times/Savanta wealth manager survey reported. Lower company valuations, better regulation and structural drivers for sustainable themes such as the energy transition, decarbonisation and healthcare are making the space increasingly attractive for long-term investors, it found.
The often extended investment horizons and patient vision required to effect change make venture capital and private equity the ideal vehicles for this kind of sustainable and impact investing. According to specialist impact investment firm Blue Earth Capital’s inaugural Impact 360 survey, over 70% of investors access impact investing via private equity, followed by venture capital (44%), private credit (36%) and infrastructure (31%). Only 8% of investors surveyed enter the impact space through listed equities. The biggest areas of focus are climate action (29%) and sustainable agriculture (14%). Infrastructure, financial inclusion and healthcare are tied at 10%.
Impact performance counts
Doing good may be a motivation. But performance considerations are critical.
A survey by consultants A&M pointed to the cost optimisation and bottom-line benefits that accessing new markets and/or improving brand loyalty by enhancing ESG credentials can have on portfolio companies’ long-term performance. Almost 80% of respondents to the Blue Earth Capital study believe impact elements will have a positive effect on business valuations over the next five years. And 83% reported that the financial returns of their impact investments have so far met or exceeded expectations.
Those opportunities go beyond investing in low-carbon portfolios. Helping transition high polluters to low polluters by investing in critical new infrastructure and processes can ultimately improve operating margins and profits, argued Better Finance founder Tenke Zoltani.
Agriculture has a growing impact
Agriculture is a key focus. While estimates vary, studies suggest the food system is responsible for 25% to 30% of global emissions, rising to around one-third when agricultural products are included. At the same time, agricultural advances are needed to feed a world population projected to reach 9.7 billion by 2050.
Investment by private equity, infrastructure and real estate fund managers in agriculture can enhance productivity, efficiency and, crucially, sustainability, Preqin observed in a recent newsletter. The investments primarily target agricultural technology (agtech) companies, with a combined $3 billion deployed across more than 200 agtech PE and VC deals so far this year. The Preqin article spotlighted InnerPlant, which in July closed a $30 million series B fundraising to support its work developing genetically-engineered living sensor plants that change colour and communicate information to an online platform when exposed to stressors such as pests, drought or disease.
Waste not, want not
For first-time impact VC fund Thruline Networks, the focus is on building waste-to-value and circular economy solutions to solve climate change-related issues. The fund is targeting early stage ClimateTech companies that address one or more waste categories, spanning agricultural waste, food waste, plastic waste, energy waste, construction waste, manufacturing waste, clothing waste and resource waste.
Buyout investor GEF Capital Partners is also targeting the waste sector, along with clean energy, energy efficiency and water. It sees opportunities in two key areas, explained founding partner Stuart Barkoff: cost savings to combat rising energy prices, and revenue opportunities in climate solution products and services. But whereas much of the capital in the climate change investment ecosystem has gone to venture capital and infrastructure, GEF focuses on lower mid-market companies. “We try to focus on where we can make an impact today,” said Barkoff. “That means looking for companies already reducing emissions or saving energy.”
Building for the future
Infrastructure, with its transformative potential and huge capital requirements, will inevitably remain central to impact investing though.
Paris-headquartered Eurazeo’s maiden infrastructure fund has just closed 40% over target at €706 million, indicating the extent of investor demand for exposure to the energy transition. Renewable energy specialist Quinbrook Infrastructure Partners exceeded the target for its Net Zero Power Fund too, raising $3 billion for its latest and largest investment pool. Quinbrook focuses exclusively on the infrastructure needed for the energy transition. Target investments include mega scale solar+storage projects, sustainable infrastructure solutions for hyperscale data centres and AI optimisation of battery storage.
And with the Energy Transitions Commission and International Energy Agency calculating that the gross investment needed to build a global zero-carbon economy will surge to $3.5 trillion-$4 trillion a year by 2030, the opportunities for private capital will only grow.
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