Q&A: Building ESG Capacity in Private Markets
BCI has more than $45 billion invested through our infrastructure & renewable resources and private equity programs. As our exposure to private markets continues to grow, so do our specialized ESG expertise and in-house resources. Building on more than a decade of ESG action in private markets, BCI welcomed dedicated ESG professionals to support our programs in 2022. Learn more from Mel, who supports infrastructure & renewable resources, and Evan, who supports private equity, as they share their perspectives on the implications and possibilities for ESG in private markets.
How is ESG evolving in private markets?
Evan: The COVID-19 pandemic was a watershed moment for the ESG movement. During a time of significant volatility, ESG integrated funds in the public markets outperformed their non-ESG integrated benchmarks, which led to an inflow of capital to ESG strategies. During this period, the private equity asset class started to recognize the benefits of ESG integration especially from risk reduction and return enhancement. We believe that ESG will continue to have a significant impact in the private equity market as it is well suited for our asset class. Private equity investors can influence management behaviour and company strategy, given their ownership positions and governance rights, and the longer-term hold periods. ESG integration is at the beginning of a long-term structural change to private equity investing.
Mel: There are no shortages in the number and complexity of risks facing businesses today, which are tied more and more to ESG and climate-related factors. Private markets are no exception. The scrutiny of private company ESG performance is increasing as investor, government, and societal expectations change and ESG data becomes more available. Private markets investors have a strong voice with companies through board seats and management oversight, and can use this to drive ESG integration and reporting. This growing focus on sustainability in private markets is driven by the clear relationship between positive ESG performance and a company’s ability to navigate long-term risks and opportunities. This is particularly true for real assets like those held within BCI’s infrastructure & renewable resources portfolio.
Which key considerations are informing the investment landscape?
Mel: Infrastructure and renewable resources are typically long life and capital-intensive assets, with potential for outsized impacts on the environment and society. This makes macro-environment trends and long-term thinking key to any investment decision. While critical factors like health and safety will always be top of mind in industrial asset classes, the physical and transition risks associated with climate change continue to define the investment landscape. On the other hand, the opportunities for investors to support the transition to a low-carbon economy by allocating capital to investments like renewable energy are significant and increasingly attractive.
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Evan: Private equity is unwavering about value creation during the life of the investment, and focusing on material ESG factors fits squarely into the value creation model. We see several catalysts that will continue to advance the focus on sustainability. These include a shift in purchasing decisions to incorporate sustainability, talent looking to work with firms where there is a mission around purpose, increased regulation, credit ratings that integrate material ESG factors, and greater flows of capital to sustainable-oriented strategies.
What will you focus on in 2023?
Evan: Private equity’s ESG focus in 2023 is centred around continuing to build a highly scalable ESG program. We want to ensure all our investment professionals have the knowledge and tools to seamlessly integrate ESG throughout the investment process: screening, due diligence, monitoring, value creation, and exit. At the core of this approach is engaging with each of our six sector teams — financial services, business services, healthcare, consumer, industrials, and technology, media, and telecom — and developing an internal view on material ESG factors for the industry segments with clear financial linkages. We will also proactively support our portfolio company management teams to educate them on emerging ESG topics. We want to ensure our portfolio companies have the tools to make ESG diffusive through their organizations. This will ensure they are able to recognize the disruptive challenges and opportunities in a sustainability-integrated economy.
Mel: In 2023, infrastructure & renewable resources will continue advancing our decarbonization plans to mitigate risk and create value for our clients. This includes leveraging our ownership positions to influence and guide our portfolio companies through the green energy transition. With our growing global footprint and new office in London, we are building capacity and empowering our investment teams to manage ESG across the portfolio. With our long-term outlook, research and staying ahead of the fast-changing trends in regulation and new technology will also be key.