By Carmela Mondino, Head of ESG & Sustainability, Partners Group
(1) Environmental sustainability is becoming a business imperative for companies globally
While in the past, the focus on sustainability was more regional, now we are seeing companies globally transition to become more environmentally sustainable. On behalf of our clients, we have invested globally in companies that help others become more efficient in resource use, replace fossil fuels and offset/capture emissions. Investments in these areas should continue to present a good opportunity. But the world is getting to the point where not addressing climate change will make any business obsolete, so this topic needs to be addressed in depth across any investment. At Partners Group, as part of our Sustainability Strategy, we require all controlled assets in private equity and private infrastructure to measure their GHG footprint, then develop a tailored GHG-reduction strategy.
(2) Economic growth no longer means higher emissions
Historically, higher levels of economic activity tended to go hand in hand with additional energy use and consumption of natural resources. However, one positive conclusion from COP27 was the confirmation that this is no longer the case. This is because less energy-intensive sectors are now contributing much more to global GDP than previously, with many companies adapting quickly to reduce their absolute emissions. This decoupling is directly relevant to our private equity portfolio, for example, meaning the growth of our assets under management and portfolio companies no longer necessarily translates to higher emissions as long as we have adequate reduction strategies in place.
"Human rights, and the financing required to realize these rights, have yet to be mainstreamed in climate change discussions. Capital markets must play a role in a just transition: we cannot forget about people."
(3) Portfolios need to be resilient to climate risks and implications
As much as net zero plans are now a must-have, we also need to ensure portfolios are resilient to climate risks. In private real estate, physical risk analysis is part of any environmental risk assessment, but it now must be done holistically throughout portfolios in other private market asset classes. At Partners Group, we are also assessing methodologies to implement physical risk analysis in private equity and private infrastructure.
(4) A lower risk portfolio can achieve more attractive financing
We are seeing sustainability-linked loans growing in popularity in the financing of acquisitions, with the need to reduce emissions increasingly included as a must-have in these types of loans. We expect the use of this kind of tool to continue to increase across capital markets. Reduced emissions de-risk a business, and the use of these tools enables investors to reflect this. In turn, this enables businesses to secure more attractive financing packages.
(5) The 'S' in ESG
Climate change is having a major impact on a large part of the world population today, but it is particularly affecting marginalized groups. Human rights, and the financing required to realize these rights, have yet to be mainstreamed in climate change discussions. Capital markets must play a role in a just transition: we cannot forget about people. After all, fighting climate change is about preserving the world so that future generations can live in it. We must avoid becoming blinded by the risks and opportunities emerging from the 'E' and ensure we continue to guarantee and support labor and communities along the way. Several firms, including Partners Group, launched COVID support funds for portfolio company employees. While the 'loss and damage' funding agreement for developing countries announced at COP27 is a great starting point, we must act quickly to avoid the need for more similar types of climate support funds.