Private equity is starting to see meaningful opportunity in climate finance.
While some firms like KKR have been focused on ESG and impact investing for more than a decade, a once exotic idea has gone mainstream and more and more PE firms are steering limited partner capital into ESG investments, especially those with a climate focus, such as renewable energy. Private equity funds that invest solely in renewable energy assets raised about $52 billion last year, a record, according to Bloomberg. And the money for such funds so far this year is 25 times the amount flowing to fossil fuel asset funding.
“The finance industry has completely evolved,” according to Dazzle Bhujwala, co-author of The Changing Climate for Private Equity, a new report published by Ceres and The SustainAbility Institute by ERM. “Private equity is responding to several new factors, including pressure from limited partners to include ESG, shifts to climate-focused policies and regulations, a better understanding of the systemic impact of climate change, and not least, a growing sense of the potential investment returns and opportunities related to climate change.”
The finance industry has completely evolved.
Private equity has the potential to make a significant impact in the climate finance field. Assets under management in the sector tripled during 2010-2020, and are expected to almost double between 2020-2025, topping a projected $9 trillion by 2025, according to Prequin. The total raised by 277 private equity firms in Q1 of this year adds up to more than $180 billion. That’s scale.
How are private equity firms adapting to essential requirements of sustainable finance operations –– data and transparency? One approach is simply to buy the analytics: Blackstone is shelling out $1.4 billion to acquire Sphera, a provider of ESG software, data and consulting services. Speaking to the scale of Blackstone’s potential investment interest, Sphera boasts more than 3,000 customers in more than 100 countries. The acquisition supports Blackstone’s green investments, including energy infrastructure company Sabre Industries; energy storage provider, Aypa Power; solar companies, Loanpal LLC and Altus Power America; and Therma Holdings, which provides energy-efficiency services, reports Bloomberg.
The total raised by 277 private equity firms in Q1 of this year adds up to more than $180 billion. That’s scale.
This deal follows KKR’s majority investment in ERM, the world’s largest sustainability consultancy, which has over 5,500 consultants, including 580 partners in more than 40 countries, according to a company press release.
Until recently, the biggest impediment to private equity making a large-scale move into sustainable investing has been the lack of commonly accepted reporting standards. No more. The ongoing consolidation of standards organizations and the growing acceptance of measurement frameworks, as they exist now, is providing enough positive momentum for PE to get into the game. “For private equity, that means investors are becoming better equipped to ensure firms are putting ESG into practice,” writes private equity journalist Andrew Woodman, in Pitchbook. “ESG standards are putting pressure on PE to adapt.”
“What we see is that private equity firms are no longer willing to let perfect be the enemy of the good,” adds Bhujwala in the Changing Climate report. “Not when climate-related investments are offering competitive returns.”
If we know one thing about private equity, it’s that it follows the money. And the money is shifting to investments that integrate ESG, especially with emissions-linked goals. The Net Zero Asset Managers initiative has now grown to 128 investors who collectively manage $43 trillion, reports Ceres. PE firms aim to play a major role in this global, high-stakes game, despite the emphasis on once-alien concepts of transparency and accountability.