ESG in private equity: a moment of glory?

ESG in private equity: a moment of glory?

ESG has gained more traction in the private equity industry in recent years. Moreover, ESG has become a core demand from limited partners (LPs) amid consumers behaviour change and the growing climate change concerns of socially responsible millennial investors.

That said, ESG considerations in private equity are being formed within contracts more frequently, and LPs can use their leverage and “walk away” if their terms are not met. With dedicated and active management, ESG investing can help firms increase return rates and outperform the market.

There has been an “evolution” among private equity managers in integrating ESG over the last three years, said Michael Cappucci, senior vice president, from Harvard Management Co. He also mentioned that ESG is now core to LPs expectations.

Investors in different regions often have different priorities for ESG investments and employ distinct strategies for influencing the behaviour of portfolio companies. In Europe and the United States, social and environmental concerns may be paramount, while in Japan, corporate governance and diversity are at the top of the list.

 

ESG Success in Private Equity

 

PE firms are moving along with ESG objectives, as long-held concerns of trade-offs between maximized returns and ESG investing have been challenged. Over the years, compelling evidence has emerged showing that the return on investment value can be magnified by incorporating ESG factors into the decision making process. Morningstar research found that investors can build global portfolios tilted toward high-scoring ESG companies without compromising return.

However, many investors make a similar mistake by focusing on a global ESG objective, instead of the factors that affect their operations and performance in a financially material way.

We can agree that a couple of months have been unprecedented. However, we have seen sustainability funds outperform their peers since the COVID-19 crisis began and across the first quarter, both in developed and emerging markets. Again, figures from Morningstar suggest that in the period through February 28, which saw the biggest downturn in stock prices globally, “the returns of nearly two thirds (65%) of sustainable equity funds ranked in their category’s top half.

More than four-tenths (43%) placed in the top 25% of their group and only 10% were in their peer group’s bottom 25%”. Morningstar data also shows that in March, when market activity saw further downturns as countries began to implement lockdown measures, 62% of ESG-focused large-cap equity funds outperformed the global tracker.

 

ESG in Private Equity Industry: Actions and Intentions

 

In 2020, private equity firms have raised more than $370bn of commitments to funds that integrate ESG principles into their investment decisions, according to data provider Preqin. However, a recent survey by Institutional Investor found that fewer than 10 per cent of 8,810 global private equity firms, with a total of $3.4 trillion under management, are signatories to the Principles of Responsible Investment.

ESG in private equity is here to stay, as well as ESG investment opportunities will increase over the next three-five years. However, the lack of harmonization of sustainability frameworks is a brake to ESG integration. The survey also found 53 per cent of respondents admitting they are not using any ESG framework like the Sustainable Development Goals (SDGs) and Taskforce on Climate-related Financial Disclosure (TCFD) to identify opportunities at a tactical level.

Therefore, private equity firms should consider setting a strategic vision and fostering a culture that sees ESG as a significant value creation opportunity.

The next stage is that investors will not just want a commitment to ESG – they will also want tangible proof of how the private equity fund has delivered on that commitment.

Digital Sustainable Finance Opportunities

Digital Sustainable Finance Opportunities

In the age of COVID-19 digital transformation is demanded, but so is the commitment to face climate change. Technology lies at the core of attempts to prevent global warming. Therefore, the combination of both sustainable and digital finance can lead to new business models that will reduce energy consumption.

According to PWC recent research, over 1200 tech startups have arisen to the market. Investment in climate tech has grown at almost five times the rate of the overall global venture capital market, with similar growth seen in numbers of deals.

Consumer demand for sustainable business practices has rocketed. The first generation of ‘climate tech unicorns’ have emerged, with companies including Tesla, Nest, and Beyond Meat showcasing the importance of disruptive consumer brands that also deliver substantial sustainability impact.

Channelling sustainable investments is a critical challenge for the global financial system. Sustainable finance has, therefore, become an integral part of how many financial services firms operate.

 

What is sustainable digital finance?

 

According to The World Economic Forum, the definition for digital finance refers to the integration of big data, artificial intelligence (AI), mobile platforms, blockchain and the Internet of things (IoT) in the provision of financial services.

Sustainable finance, on the other hand, refers to financial services integrating environmental, social and governance (ESG) criteria into the business or investment decisions for the lasting benefit of both clients and society at large.

WEF believes that blockchain represents a core element of sustainable digital finance — a new paradigm that combines emerging technology with environmentally conscious business models.

Moreover, blockchain technology along, with artificial intelligence, mobile platforms and the Internet of Things combined with ESG objectives, could help governments and organizations reach sustainable goals.

In addition to that, technology can also help raise consumer awareness about the environmental and social implications of consumption and allude them to more conscious sustainable choices.

 

Consumers behaviour affects sustainability

 

Consumer behaviour can affect investors decision to incorporate sustainability into investment decisions. A clear ESG commitment can also attract Millenials, as sustainable consciousness consumers. A 2019 Morgan Stanley Institute for Sustainable Investing survey of high net worth investors found that 95% of millennials were interested in sustainable investing.

In Switzerland, Deloitte research suggests that 42% of millennials started or deepened a business relationship because of a company’s positive impact on society or the environment.

Sustainable products are starting to demonstrate higher growth rates than their non-sustainable rivals. In the US, sustainability-marketed products make up just 16% of the consumer packaged goods market but are responsible for 55% of the growth. 

The shift to digital persists across countries and categories as consumers in most parts of the world keep low out-of-home engagement. Food and household categories have seen an average of over 30 per cent growth in online customer base across countries.

Lastly, WEF believes that sustainable digital finance will play an essential role in efficiently channelling this capital to fuel innovation, growth and job creation, at the same time supporting the transition to a sustainable, low-carbon economy. The future is now, with the wake of COVID-19, digital sustainable finance could focus investors on more sustainable economic oppor

ESG Investing Guide: Advancing ESG strategy

ESG Investing Guide: Advancing ESG strategy

Venture capital firms have historically been the first investors in many of the world’s largest and most influential companies. You have been hearing more and more about ESG investing. Research is increasingly showing that this investing method can reduce portfolio risk, generate competitive investment returns, and help investors feel good about the stocks they own. That said, it’s not a surprise that ESG investing is gaining more traction.

ESG investments are growing rapidly, comprising about 25 per cent of all funds under professional management, according to various estimates. At the same time, there are people who believe that you cannot make money through sustainability, social justice, and ESG investments. That said, it is time to establish some ESG standards for investors. The goal of ESG investing is to provide suitable returns and benefit the greater good. One of the ways it does this is by minimizing risk.

ESG portfolios not only have outperformed traditional financial assets this year but also a data analysis prepared by Morningstar concluded that almost 60 per cent of sustainable investments delivered higher returns than comparable funds over the past decade. 

ESG investing has often been defined, not so much by globally accepted and agreed definitions and standards. Furthermore, several terms come into play for ESG investments. That includes: sustainable investing, impact investing, socially responsible investing, and more. Many investors think they can “do good” by investing with one of these objectives in mind.

While that may be true, industry experts have come to the conclusion that ESG investing needs standards. ESG reporting and data may help align what managers say they are doing with ESG outcomes.

How ESG investing is different

ESG is most like SRI in that it focuses on investing in publicly traded companies. However, ESG investors actively opt in to companies because of the impressive environmental, social, and governance attributes they’ve demonstrated. Sometimes, ESG homes in on companies’ material issues, which depend on their industry. For ESG investors, charitable giving is not usually a financially material aspect to consider. But climate change, along with its causes and effects, is a financially material issue, as global warming will substantially impact every company everywhere.

The ESG investment movement has every reason to be optimistic in the short term. There is growing investor and stakeholder momentum for the goals of expanded disclosure, improved corporate governance, and measurable plans and impacts, especially for climate change.

When rationalizing ESG investing with the greater SRI industry, it’s important to remember that ESG is also a stakeholder-centric theory, which argues how companies treat all their stakeholders will impact their long-term success or failure. Moving ahead, ESG investing has experienced a great deal of traction within the financial world.

ESG returns

According to Morningstar, investors can build global portfolios tilted toward high-scoring ESG companies without compromising return.

Companies with low levels of gender, racial, and other forms of diversity across workforces, management teams, and boardrooms lose out on intellectual capital and valuable perspectives. 

On the other hand, companies that excel at engaging their employees to achieve per-share earnings growth more than four times higher than rivals, according to Gallup. Compared with the companies in the bottom quartile, those in the top quartile when it comes to engagement generate higher customer engagement, higher productivity, better retention, fewer accidents, and 21% higher profitability.

Plenty of data backs up the notion that high-ESG companies are also well-run, ultimately producing financial results comparable to or superior to their low-ESG peers.

Ethical investing has come a long way since SRI was a small niche in the investing universe.

Millenials adapting ESG

According to US SIF’s 2018 Report on Sustainable, Responsible, and Impact Investing Trends, total SRI assets jumped 38% to $12 trillion since 2016 in the U.S. alone. A frequently cited reason is that millennials consistently show a tendency to crave social responsibility, whether it’s in the products they purchase, the organizations they work for, or their investment portfolios.

Millennials are a massive generation, comprised of at least 71 million individuals who were born between 1981 and 1996 in America alone. Millennials represent $600 billion in annual spending in the U.S., a figure expected to grow to $1.4 trillion annually by 2020, according to Accenture.

Most millennials have yet to weather a major economic downturn before and so their investment strategy remains untested. In the event that we see a recession, ESG-related sectors could take a significant hit – especially if younger investors bail on their ESG investment theses under pressure.

Sustainability in Business in the post-COVID world

Sustainability in Business in the post-COVID world

In the post COVID, world sustainability in business is becoming more meaningful. The research found that 69 per cent of those experiencing significant disruption expecting green issues to rise in importance. 

That seems to be the truth. Despite the extremely challenging market conditions, businesses are facing sustainability is one they should prioritize. 

The research was conducted by Carbon Trust’s second annual ‘Corporate attitudes towards sustainability’ survey, by B2B International with large companies across Germany, France, Mexico, Singapore, Spain, and the UK. 

Three-quarters of organizations interviewed were negatively impacted by Covid-19, with four per cent saying it represented an existential threat to their organization. Furthermore, 32 per cent reported that their operations had been heavily impaired.

Organizations around the world are considering their role in delivering a green recovery – achieving net-zero targets at the same time as fostering economic.

Driven by fast retailing fashion and footwear industry is also facing increased social, environmental, and regulatory pressures.

Leading brands are rethinking their business models and leading the change to a more sustainable future for the footwear and fashion industry. And consumers are looking for companies with a sustainable soul. For example:

  • 93% of global consumers want more of their favourite products, services and retailers to support worthy social issues
  • 96% of people have a more positive image of companies that support Corporate Social Responsibility
  • 93% of shoppers are more loyal to brands that back cause
  • 91% of customers are likely to switch brands (given comparable price and quality to one associated with a good cause).

We should all commit to better business practices to create a more sustainable business and inclusive world for all. 

Sustainability in business practices

It is time for more sustainable supply chains, a greater focus on green finance and a commitment to social innovation. 

As McKinsey reports, there has been much discussion about the shortening of supply chains, reshoring or near-shoring, and emerging hubs of manufacturing such as the Philippines, Hungary or Costa Rica. In the McKinsey survey, 85% of respondents struggled with insufficient digital technologies in the supply chain, while 90% now intend to increase digital supply chain talent in-house.

Harvard Business Review covers in-depth how sustainable supply chains form a better business practice. The study covers how multinational corporations have pledged to work only with suppliers that adhere to social and environmental standards. In the study, the aim is to describe various ways that MNCs can tackle the risks and understand the situation.

From solar power farms to flood defences, the world needs to build more sustainable infrastructure. To build it, we need to have specific targets on the issuance of green finance. First things first, the private sector should collectively agree on a common set of environmental, social, and governance (ESG) metrics to promote green finance.

Once those metrics are established, businesses should integrate sustainability reporting into financial updates as a matter of course.

Finally, the private sector has a massive role in supporting start-ups in the social innovation space and helping ensure everyone has access to the digital tools they need. As an example, Microsoft launched an initiative to help 25 million people worldwide acquire the digital skills needed in the post – COVID world.  

If you are looking to help bring sustainability in business, lend your expertise and back the entrepreneurs. There are many examples of small business owners, start-ups and foundations who help bring sustainability to the economy. Another sustainable start-up is Agrivi, from Croatia, with a vision to change the way food is produced in its core and positively impact one billion lives by helping farmers reach sustainable, resource-efficient and profitable production.

To sum up, businesses should rethink the role of business in the economy. Bringing sustainability in business will help society when the next crisis arises, be it financial, health, cyber or otherwise.

Record Month for Green Bonds

Record Month for Green Bonds

Green Bonds can help governments raise finance for projects to meet climate targets and are enabling investors to achieve sustainability objectives. Like conventional bonds, green bonds allow the bond issuer to raise funds for specific projects or ongoing business. The “green” label tells investors that the funds raised will be used to finance environmentally beneficial projects.

A recent study by BloombergNEF (BNEF) published that Green bonds have passed their biggest milestone yet, with more than $1 trillion issued since these securities first emerged in 2007. More than $200 billion worth of green bonds – which are used to finance the pursuit of environmental projects and activities, from wind farms to wastewater management – have been issued in 2020 thus far.

Green bonds have become known for their impressive growth, with global issuance increasing every year to date, reaching a record of more than $270 billion last year. However, for 2020 the trend is slightly changing. Still, there were in September, more than $50 billion bonds issued. Germany federal government issued a 6.5 billion-euro ($7.7 billion) sovereign bond at the start of the month, making it this year’s biggest single new green bond. Adidas, French electricity firm EDF and telecommunications firm Orange, along with Germany, Egypt and Sweden, all issued green bonds last month, helping the volume jump by five times from August.

The integration of environmental, social and governance criteria has never been more important for investors than in 2020.

The ICMA defines green bonds as those which finance renewable energy, energy efficiency, biodiversity, pollution reduction and other similar projects.

Today, renewable energy is present in around half of all green bonds issued. The cumulative issuances of green bonds are below USD 1 trillion, while the global bond market is valued at around USD 100 trillion, accounting for less than 1% of cumulative global bond issuances. To grow the green bond market, co-operation between policymakers, standard setters, capital providers and investors is essential.

Last month’s boom is due in part to the fact that many operations were postponed earlier in the year because of the coronavirus pandemic. The sector still has to improve the evaluation of projects that receive the green label, however.

Other companies, such as luxury house Chanel, issue so-called sustainability-linked bonds meanwhile, reports Straitstimes. The proceeds from these bonds can be used to finance any type of project, but the borrower makes pledges to meet certain sustainability targets and pays a penalty if they fail.

 

Sustainable Startups in CEE

Sustainable Startups in CEE

In a world of limited resources and to cope with global challenges, the world needs new ways of production and consumption. Innovative and sustainable ideas are needed that contribute to shaping our world more ecologically. There is a rise in sustainable startups in CEE – changing the world towards sustainability.

The CEE region continues to evolve and compete to be at the forefront of the European tech startup scene. Moreover, CEE startups produced over 10 unicorns with a combined value of €30 billion. 

We’ve focused on these five Eastern European start-ups that are working to make the world a greener place. Sustainable startups in CEE are looking to optimize various processes within the value chain and thereby drastically reduce the ecological footprint. 

 

Top 5 Sustainable Startups in CEE

 

The role of the startups is proven to be important in the innovation process. Therefore, sustainable recovery needs to be backed by venture capital, governments, industry, investors, and other stakeholders. These five sustainable startups in CEE have emphasized the importance of sustainability and climate change the world is facing.

Aeriu – Hungary

Aeriu is a Hungarian startup helping companies to manage inventory while providing a safer environment. Aeriu found a replacement for Forklifts and Electric Scissor Lifts which are using 72 kW electricity in one hour. Since the online business has been booming, the inventory management system has been more and more in the focus of companies. In most companies, it still goes through a manual process which is very complex. Slow, uncertain and it requires more resources: working time, forklift trucks, and energy. Aeriu focuses on simplifying and optimizing this process.

Poland sustainable startups

Handerek Technologies – a sustainable startup from Poland created a patented technology that transforms waste plastic into low carbon alternative fuels. Poland has gained a reputation in the past few years as the new startup-friendly ecosystem. Moreover, this sustainable startup is one more tech startup that has risen from Poland.

This company built a prototype reactor that works via a circulating liquid heat carrier, that allows controlled surface heating. The controlled heating is important to prevent the raw material from burning. The fuel has been tested by the Automotive Industry Institute in Warsaw and the fuel complies with European Standards.

Another sustainable startup from Poland is Make Grow that transforms organic waste such as fruit or vegetables into sustainable packaging or leather alternatives. The organic waste is woven through a biological process and thus turned into material.  The final product is 40 times stronger than paper, 100% plastic-free, not water-soluble, self-adhesive, and best of all, you can compost it at home.

RV Magnetics – Slovakia

RVmagnetics MicroWire replaces several sensors and interfaces with just one. It senses low power consumption therefore it reduces the environmental footprint.

Smart Shelves can detect the addition and removal of items placed on them and give real-time information to the management. The Sensor can solve inventory management issues, especially overstocking and waste reduction.

CleverFarm – Czech Republic

CleverFarm a startup founded in the Czech Republic is a 4-year old, fast-growing, agricultural company that provides data-driven farm management.

CleverFarm’s vision is to enable farming to be automated, economically efficient, and sustainable. Thanks to the use of real information based on SITU research, machine learning, and satellite data, CleverFarm can bring effective water irrigation, threat prediction, reduce the use of fertilizers and chemicals, protect commodities and improve overall farm management.

Startups are crucial elements of fostering knowledge-intensive and sustainable growth. Looking at these examples it is clear that there is a huge potential for sustainable startups in CEE. However, the breakthrough technologies need to be successfully integrated into the market. Therefore it is crucial that governments, industry, investors and other stakeholders support innovation with the aim of accelerating transitions to a green and more sustainable future.