The Sustainable Finance Institute and its Future of Private Equity initiative proudly presents our first case study report, showcasing how General Partners (GPs) are advancing climate-specific investments.
Previous discussions regarding the future of Private Equity have mainly focused on two areas:
1) how GPs can effectively collaborate with their portfolio companies, and
2) how to generate robust ESG data for these private entities. State-Owned Enterprises - particularly in China, which operate similarly to privately held organizations - are now mandated to report on ESG metrics, further emphasizing this trend.
Limited Partners (LPs) also have concentrated on:
3) conducting due diligence on GPs they currently partner with or are considering for new capital injections.
Our primary focus is on implementing progress within private equity investment strategies and culture.
It is increasingly critical for LPs to understand whether their financial partners are adequately addressing climate risks, along with other significant environmental, social, and governance (ESG) concerns. For instance, Brad Lander, the New York City Comptroller, has recently criticized financial institutions for distancing themselves from the Climate Action 100+, despite its focus on publicly traded companies. The broader implications of neglecting ESG principles cannot be overlooked.
The so-called anti-ESG movement, particularly evident in Republican-led state governments in the U.S., overlooks the necessity of effective corporate governance. Focusing on responsible management is essential to ensure that investments are not allocated to poorly managed companies at risk of underperformance or failure.
Such anti-ESG initiatives contradict best practice fiduciary duties from both prudence and loyalty perspectives. Moreover, considering that Asia accounts for nearly half of the global economy, it raises questions about the feasibility of ignoring governance issues in this region while fulfilling fiduciary responsibilities. Can investors genuinely uphold their duties when overlooking such a significant market? It is also crucial to ensure that private equity does not become a last resort for potentially stranded assets in a climate-constrained world. According to experts like Bloomberg New Energy Finance, significant capital is required for climate innovation and renewable energy deployment, yet trillions in dry powder remain unallocated.
Transforming Private Equity to support essential climate strategies is vital for LPs as they consider the interests of both current and future beneficiaries. A timely examination of how GPs are currently positioning themselves is warranted, particularly in September 2024.
In 2023, total assets under management (AUM) in private equity reached approximately US$8.2 trillion (McKinsey), compared to a broader financial system valued at over US$500 trillion (Krosinsky, 2020). Climate-specific assets are estimated at around US$217 billion (CTVC), a figure that includes venture capital (VC), infrastructure, corporate VC, and growth equity. In China, the leading investor in the low-carbon transition, a significant portion of this investment is driven by State-Owned Enterprises, highlighting a crucial competitiveness issue within the private asset landscape.
Furthermore, a significant portion of privately owned assets is tied to coal, oil, and gas production. While these assets have not yet been deemed potential stranded assets, the risk remains, especially as the world reacts to accelerated climate change.
LPs are increasingly interested in investing in climate solutions and are often reaching out to their current partners. This presents a clear opportunity for LPs to facilitate a positive transformation in GPs towards climate strategies. GPs, in turn, can demonstrate their advancements, which will significantly contribute to bridging the climate investment gap.
The Sustainable Finance Institute is actively collaborating with leading LPs and GPs in an iterative process aimed at achieving mutually beneficial progress in qualitative areas, including strategy, culture, and financial performance. We anticipate publishing more case studies in the coming year and welcome opportunities to engage with additional LPs and GPs.
Below are examples of how ten leading GPs are beginning to establish new climate funds.
*This paper was researched by Cary Krosinsky, Rongying Lin, Hiren Rana, Johnny Huang and Ethan Rosenstein
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