The ESG flourish of the last few years occurred in a zero-rate environment. The industry’s playbooks, products, and personnel will adapt and innovate to be effective and competitive in drastically different economic conditions, not least of which is the profound and rapid impact of new technologies.
Infrastructure and energy transition remain top of agenda for private markets fund formation and strategic partnership discussions.
Even in a tough fundraising environment in 2023, multiple big climate-focused fundraisings were closed and/or announced: BlackRock announced a new Climate Transition-Oriented Private Debt Fund, Blackstone closed BGREEN III at its hard cap of $7.1 billion representing the largest energy transition private credit fund ever raised, and Brookfield announced the close of a record-sized $28bn infrastructure fund, to name a few.
Several Blue Dot clients are undertaking firm-wide strategic review of energy transition investing, including product and distribution partnerships with dedicated infrastructure and energy transition platforms. As the ongoing consolidation in private markets continues, energy transition investing expertise and proven track records will be prized considerations for acquiring firms.
Energy transition is also part of the other strategic focus area of private markets firms: distribution to wealth channels. Apollo recently added an energy transition product to its European wealth platform. We expect more climate-focused wealth products from alts shops and in support of product distribution: a greater focus on the climate and energy transition opportunity set in their advisor outreach and education efforts.
The much-criticized ESG alphabet soup served its purpose. It provided companies and investors with a framework to understand and develop processes for collecting and managing data for which they had little to no precedence of. No mean feat, if you consider the current expanse of global sustainability reporting, achieved in just a few short years.
With the IFRS Foundation assuming governance of Sustainability Accounting Standards Board (SASB) and Task Force on Climate-related Financial Disclosures (TCFD), and with ongoing harmonization efforts with the Global Reporting Initiative (GRI) and European Sustainability Reporting Standards (ESRS), the sustainability disclosure landscape has now matured.
At this juncture, companies and investors should not, and need not, spend significant resources on determining what is material, what to report on, etc. A critical mass of institutional-caliber guidance is readily available. Yes, there will be tweaks and improvements on the margins (led primarily by greater clarity from regulators and ongoing interoperability amongst standards and frameworks), however, for most parts, the institutional foundation for determining materiality of, and measuring ESG and sustainability topics and metrics has been laid.
What will improve dramatically over the coming months and years are the tools and resources that companies and investors will have at their disposal to better analyze data and extract decision-useful insights. ESG reporting will evolve to be - as it has always been intended to – a means to an end.
The one area where private markets firms still lag traditional asset management firms is the engagement with ESG data.
At most private markets firms – except a few select platforms where ESG data analysis has been entrenched into the portfolio management process - ESG data management still largely remains an exercise in data collection led by the ESG teams. That will, gradually but surely, change. Deal teams, portfolio operations teams, and investment committees will start to engage more critically with ESG data to extract insights and signals.
Leadership teams of private markets firms recognize this. It won’t be hyperbole to say that ESG governance and information coordination protocols, and capacity building are part of almost every conversation we have with the management teams and the ESG teams of our GP clients.
With deal activity projected to improve in 2024, sustainability and ESG will be part of the exit value proposition and readiness package. This applies to not just the traditional financial and strategic exit routes. We are seeing (and have advised on) secondaries transactions with a focus on ESG.
More than 60 countries representing half of the world's population will hold elections this year. At a time when geopolitics is already volatile, the outcomes of the elections will have significant implications for energy transition policies, capital flows, trade negotiations, supply chain reconfigurations, emerging industrial policies, to name a few.
It is undeniable the role that national and supranational policies and incentives have played in spurring the energy transition investment momentum. All eyes will be on how the results of the 2024 elections impact the future trajectory of energy transition investments.
The IMF made a renewed case for global carbon taxes in its October 2023 Fiscal Monitor. Currently there are nearly 30 countries with carbon taxes. The UK is set to introduce a carbon border tax in 2027 for imports of emissions-intensive goods such as iron, steel, aluminum, ceramics, and cement. A new cap-and-trade framework is expected in Brazil.
Investors should be paying close attention to how the global carbon tax landscape evolves to ensure their portfolio companies are well-positioned to navigate the pricing and competitiveness considerations of carbon taxes.