Private markets can offer a number of rewards for investors, including a breadth of opportunities and the potential for higher returns. As the world transitions to a net-zero economy, private markets can play a vital role in facilitating the evolution. With investments across a variety of asset classes, from private capital to real assets, private markets can demonstrate the power of capital investment in a much more meaningful way than public markets. The range of possible investments can include the efficient creation and enhancement of infrastructure, the provision of capital to businesses, and projects that promote sustainability.

While world leaders are busy drawing-up plans to achieve net-zero targets, their framework cannot succeed without significant amounts of investment. High debt levels in most economies mean there's little space for manoeuvre, despite the willingness to save the planet from climate change-related disasters. We believe that private markets have a significant role to play in the journey of sustainable investment.

Creating long-term value

Instead of the traditional model of acquiring businesses, restructuring and selling them within three-to-five years, investors are developing companies over a longer period. This generates value along the way, and it has undoubtedly increased the quality of stewardship for private companies.

In the last two decades, private market investors have been involved in projects that would have previously been provided by governments, such as roads and schools. This is putting pressure on private companies to consider social outcomes, and the part that businesses and services play in the communities they serve.

Time matters in the journey towards achieving net zero. Private markets can provide equity or debt facilities to companies, which allow them to evolve into more sustainable businesses over a longer time horizon. Directly or indirectly, private companies can invest in climate solutions that will aid and enable the reduction of greenhouse gas (GHG) emissions. New investment opportunities arise by embracing emerging technologies, creating solutions to remove GHG from the atmosphere, investing in transition portfolios to help mitigate their impact on the environment, and targeting solutions to climate change.

Vast investment opportunities

Investing in renewable energy infrastructure through a public or private lens has been a key focus in recent decades. Renewable energy has also provided the outstanding returns that asset managers are mandated to deliver. But to successfully deliver the next decade of climate change-related targets, a more ‘out-of-the-box’ approach is required.

In today's competitive environment, private market investors are likely to have an asset-class agnostic investment strategy that allows investment across the spectrum. This could involve supporting emerging technologies by using venture capital or facilitating the energy transition by investing in infrastructure or real estate. These include:¹

Historically, private capital and real assets have had a significant role in their investee companies. By sitting on the boards of businesses and projects, they can directly influence the management of materials, labour and energy costs. Alongside public market investment, they now have an even greater responsibility to invest in those businesses that promote and develop the sustainable factors that investors desire.

Driving benchmarking

The predominant environmental, social and governance (ESG) consideration in public markets has been benchmarking and ESG scoring, given the abundant metrics available on those issues. But the heterogeneous nature of private markets makes it harder to establish a unified ESG benchmark.

Using a materiality matrix based on the Sustainable Accounting Standard Boards, we capture and embed sustainable considerations into our investment process by identifying issues associated with data security, GHG emissions, energy management and employee health & safety. We've piloted an ESG questionnaire to collect data from managers. It covers a range of asset classes and key aspects of ESG, such as policies, commitments, and climate-change disclosures. The intention is to gather underlying data that we can collate, score, and monitor over time, which will allow us to track the progress managers are making. This also helps us influence their sustainability journey.

Using a materiality matrix based on the Sustainable Accounting Standard Boards, we capture and embed sustainable considerations into our investment process by identifying issues associated with data security, GHG emissions, energy management and employee health & safety. We've piloted an ESG questionnaire to collect data from managers. It covers a range of asset classes and key aspects of ESG, such as policies, commitments, and climate-change disclosures. The intention is to gather underlying data that we can collate, score, and monitor over time, which will allow us to track the progress managers are making. This also helps us influence their sustainability journey.

Embedding sustainability

Sustainability encompasses issues such as climate and environmental change, urban living, population dynamics, governance and engagement, and the effects of technological developments. As private owners/managers of businesses, we can gain a deeper understanding of these complex issues and drive change. More importantly, we can influence operations by embedding our sustainable investment standards in a business.

As sustainable investing has evolved, we’ve seen improvements in supply chain management, an increased focus on product design and development, and better financial discipline at a number of our investee companies. This should lead to a more efficient use of resources, lower energy consumption and more efficient labour utilisation. Implementing these practices can be considered a proactive approach to ESG – but, importantly, it’s just good business practice.

Increasingly, we've seen the integration of sustainable factors across private companies, which will strengthen their position when private market managers plan to sell. By empowering direct ownership, we can affect climate change-related actions at the company/board level.

COP27 has come to an end – but there’s still so much to be done. The pace of battling sustainable issues is gaining momentum, enabled by creative thought processes and technological advances. In private markets, we are privileged to be in a position where we can use capital to drive the climate agenda. We aim to invest in business and real assets to create a more sustainable world.