At Sirec Energy, we recognise the sustainable value we are able to create, not just for our clients, but also for the benefit of all stakeholders across society, by investing in environmental sustainability.
ESG assets are now estimated to total $41 trillion this year, equating to roughly one-third of all global assets under management. The growth trend of these assets is also strong, having risen from $35 trillion in 2020, and being projected to reach $50 trillion in 2025.[1]
This means that ESG investing, and sustainability as a sub-category of that, is now firmly established as a mainstream investment trend. More investors are increasingly looking as ESG credentials to make investment decisions, and there is demonstrable growth in the demand for strong ESG credentials.[2]
There is greater understanding now among investors that strong ESG credentials represent more than just a company’s awareness of wider environmental, social, and governance issues. Strong ESG credentials demonstrate that a company is inherently well run and is mitigating the potential risks it faces from environmental, social and governance issues, and is thereby a good investment prospect.
All of this means that it is imperative for private equity investors to pay attention to the ESG credentials of their target and portfolio companies for the benefits to returns this will bring. Cementing this link between private equity and sustainability, more recognition is being paid to the power of investment capital to create sustainable environmental value, whilst achieving better risk-balanced return on investment.
At COP26, Mark Carney, the UN Special Envoy for Climate Action and Finance secured commitments from over 450 firms in the financial sector, with over $130 trillion of assets under management between them, to reallocate their assets towards investing in accelerating the transition to a net-zero carbon global economy. However, private equity firms are among those conspicuously absent from the list of members committing to the Glasgow Financial Alliance for Net Zero (GFANZ).[3]
This absence from GFANZ suggests that private equity still has a larger role to play in driving sustainability. If the aim of GFANZ is to reallocate investment capital away from funding fossil fuels, and towards driving sustainability related projects, such as renewable energy and carbon recapture, then private equity must commit to doing this also, rather than stepping in to fill the funding gaps for fossil fuels, once the other money moves.
[1] https://www.bloomberg.com/company/press/esg-may-surpass-41-trillion-assets-in-2022-but-not-without-challenges-finds-bloomberg-intelligence/#:~:text=London%2C%20January%2024%2C%202022%20%E2%80%93,surpassed%20%2435%20trillion%20in%202020
[2] https://www.acuitykp.com/blog/rising-investor-demand-for-esg-in-their-portfolios/
[3] https://www.institutionalinvestor.com/article/b1wcy05c38ntmh/The-130-Trillion-GFANZ-Coalition-Is-Just-More-Blah-Blah-Blah