Onno Bouwmeister, Global Sector Head - Private Equity at Vistra, writes an open letter to the PE industry about the major role it could play in driving the ESG agenda.
As the great and good gathered at the 50th World Economic Forum in Davos, Switzerland, earlier this year, there was one dominant theme on the agenda – the climate crisis. From a damning speech by 17-year-old climate activist Greta Thunberg, to panels featuring the C-suite of some of the world's largest businesses – including the likes of Coca-Cola and Dow Chemical – issues centred on the environment and sustainability stole all the headlines.
Admittedly, the passion was tempered in some quarters – most notably by politicians whose arguments ranged from pragmatic realism to climate denial. What was undeniable, however, is that climate change, indeed broader environmental, social and governance (ESG) issues are gathering momentum, especially from a corporate and investment standpoint.
A LinkedIn post from the President and CEO of Nasdaq, Adena Friedman, sums up how front-of-mind the matter has now become. Ahead of Davos, she posted:
"Last year, I predicted that 2019 would be a big year for the emergence of ESG, and there were real signs of progress – particularly as ESG decision-making rose to the Board and C-suite level across many industries. 2020 is increasingly looking like it may be the 'tipping point' year for ESG investing."
The rise of ESG investing isn't news, of course, it is a trend that has been growing steadily for years, but that growth is now speeding up. But there are three things that are worth considering in context.
- According to the Global Sustainable Investment Alliance (GSIA) annual review, assets under management that are invested sustainably stood at $30.7trn globally at the end of 2018 – a 34% increase in two years
- It has been predicted that over the next two to three decades, the millennial generation could put between $15trn and $20trn into US-domiciled ESG investments alone. This figure would roughly double the size of the current US equity market
- If Adena Friedman's post is anything to go by, ESG is now becoming embedded in the corporate decision-making process
Put simply, ESG investment is growing, looks set to grow even further, driven by a generation of socially engaged investors, and the C-suite has truly woken up to its possibilities and implications.
The role of private equity
So, all of this begs the question: exactly what has this got to do with the private equity (PE) industry?
In our recent research study, 'Private Equity: Where Challenges Meet Opportunities', we asked whether ESG is 'the new normal'. And while the answer might be 'not yet', it's Vistra's view that it will be in the very near future.
Not only do the notes above point in that direction, but 82% of respondents to our study believe that millennials and Generation Z will provide a new level of socially engaged investors. It seems that there is going to be no looking book – and PE not only has to be on board, but it has the opportunity to drive the agenda.
It would be easy for PE to focus on the challenges posed by the shift toward ESG – indeed, our survey showed that transparency requirements are expected to increase the compliance burden making costs rise as a result. But that is a pain that PE firms are going to have to endure. Besides, we are an industry that is used to regulation and transparency and everything that comes with it.
This perhaps isn't helped by the lack of an accepted international standard, but there are a number of standards that provide concrete guidance and the industry may well have to come together to agree and work to its own set of recognised standards.
The reality, however, is that this is about the bigger picture, in more ways than one. Firstly, there is the potential benefit to the PE firm itself – our study showed that 'driving new business' and 'positive reputational impact' were chosen respectively by 63% and 62% of respondents in terms of how the push to ESG was impacting the industry. This will inevitably trickle down to the portfolio companies.
But as much as it might be about future valuation, it is about doing the right thing for future generations. The next generation of investors are going to increasingly mandate ESG or socially responsible investing (SRI). Indeed, we see this already happening, with large pension funds looking for these types of investments and reporting.
While PE has the opportunity to drive and shape the agenda, we believe there is a will to do that. PE is driving new projects – so there is the ability to embed ESG and build it from the ground up. Yes, it will shake things up – it will be disruptive to a certain point – but we can either choose to lead or follow, with the risk of being left behind.
PE is often viewed in a negative light – controlling the world and making a lot of money buying and selling companies – but if it takes a leading it can add value on the broader scale that is not just money-driven, but is of value for us all.
Doing the right thing is one of Vistra's values – and while we strive to achieve our own high standards, it will always be a work in progress. At the same time, we are here to help our clients on best ESG practice, the implementation of standards and all the appropriate reporting. As such, we can all be part of this important future.