How private equity can help billionaires save the planet

We have already seen the potential of private wealth investing in sustainability – through private equity and co-investments – reaping the benefits of the combination of private and public money.

It is clear that while governments and the public sector will continue to play a key financing role, there is a need for the private sector to engage and help close the post-Covid-19 financing gap.

There is no doubt that an often uncomfortable relationship between public and private capital will change. And in making that change, it is vital that there is a meaningful role for private capital in the sustainable sector in the years ahead.

Show leadership

Those who disproportionately have resources – be it high-net-worth individuals, family offices or conventional limited partners – have an obligation to show leadership.

Claiming that “billionaires will save the planet” is probably too crude, but they do have a vital role in the recovery.

This is a challenge and an opportunity for the private equity sector internationally. It is a challenge in that it will have to become the instrument of fundamental change. It is an opportunity in that its record illustrates that it has the capacity to implement fundamental change when it is an imperative.

The strategic issue here is surely settled. Private equity must be at the forefront of green finance and sustainable finance.

The tactical dilemma is how to do this at the scale and speed demanded. The private equity industry will also play an important role in facilitating that. But there is associated pressure on that industry to change to meet the demands of patient capital and longer-term investing. Private equity should have genuine advantages over the public markets in this field.

But currently the rhetoric is far ahead of the reality on the ground. LPs’ investments equally seem to be not exactly what they say they actually want. Which, at the end of the day, remains returns.

While everyone seems to have recently read a report to suggest that returns and ESG are not exclusive, what we do not yet have is a cast iron consensus on the issue. More work is required to prove the point.

The post-Covid “ESG conversation” is almost too loud right now. I rarely hear conversations about trends in future reporting, or about so-called demands from LPs which are grounded by the context of current coverage in governance reports.

In September, the World Economic Forum, in association with the “Big Four” professional services firms, published a set of ESG metrics. Four pillars, covering 21 core and 34 expanded metrics, this is quite a slimmed down set of metrics, but still no mean feat to provide them from a private portfolio in a cost-effective manner.

Damascene converts

It is all well and good to welcome so many Damascene converts in a short space of time, but, frankly, much of the dialogue seems to leave practicalities out of it. The Institute for Sustainability Leadership, University of Cambridge, report In Search of Impact: Measuring the Full Value of Capital is one of the most frank and honest expositions of the gap between what is readily measurable and what is purported.

All that LPs really need are sets of simple metrics and reporting, aligned with a set of simple variables of ESG or sustainable factors. We are seeing administrators beginning to develop these products – indeed, in Guernsey, we have groups of firms and professionals who are already committed to the practice.

For climate finance there is only one simple measure: carbon content of the portfolio and its path to zero. Yet the propensity is to over-engineer. The EU Taxonomy is a great illustration of the case in point.

Back in January, I welcomed it as helping move the globe to common standards and a common taxonomy for green investments, saying that this was clearly required to help route capital to climate finance.

Investors’ need for trusted, transparent product was the rationale behind our creation of the Guernsey Green Fund regulatory regime. It provides confidence from a regulatory wrapper, and aligns with current global green standards.

The concern with the EU taxonomy was its application in practice and the likely granularity of the approach to implementation, which may well end up with a Markets in Financial Instruments Directive II degree of complication.

The EU’s Technical Experts’ Group report on taxonomy last year was difficult to follow, even for those such as me, who like to think they know their stuff. At 414 pages it was too long, but nothing like the probable length of any regulatory technical standards likely to eventually emerge from European Securities and Markets Authority to guide implementation.

However we have subsequently seen the UK row back from a wholesale transposition of the EU Taxonomy and look to create a more streamlined version.

For me, the private equity industry and private markets need the comfort and confidence of a robust green investment product, aligned with global standards, without the cost and complication of such prescriptive rules as the EU, and the likely incorporation into a revised Alternative Investment Fund Managers Directive post-Brexit.