A Sustainable Investment in Journalism

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Commentary

Integral and Influential

Karin Pasha-Huizinga, Responsible Investment Officer at Colesco Capital, says private markets should be frontrunning the transition towards a more sustainable society.

Consumer behaviour is changing rapidly: vegan and vegetarian menus can now be found at the vast majority of restaurants, vintage clothing shops are popping up, taking a reusable cup to a coffee shop is now commonplace, and energy ratings have a significant impact on house prices.

In Europe a big shift towards a more sustainable society is taking place, combined with a shift towards investing sustainably in both public and private markets. Although asset owners and regulators focus primarily on public markets, sustainable investing might be even more top of mind for private equity and private debt managers. Sustainability is crucial and opportune in the private market given the direct and long-term relationship investors have to help shape a company’s practice or governance.

When investing sustainably, many already account for the possible financial impact of ESG factors, as an extension of the risk lens. Increasingly, we see investors take it one step further by asking themselves: how do our assets impact the environment and society around us? And how can we limit any material adverse impacts of our activities?

Momentum behind investing sustainably

Aside from the potential positive and negative impact of ESG factors on company value and investor return, there are several other reasons why responsible investing has become important for institutional investors:

  • To align with the increasing demands of beneficiary preferences towards sustainable returns, in addition to financial returns;
  • To anticipate and prepare for increased and evolving sustainability-related laws and regulations;
  • To utilise new investment opportunities arising from mega-trends; and
  • To make a positive contribution towards a more sustainable society.

Investing sustainably in private debt and equity

Given how fast sustainability standards are developing, in combination with the illiquid nature of private assets, investors must be on the front foot. If you don’t help the companies you have invested in to become more sustainable, you’ll end up with no buyers nor lenders for your portfolio company.

Add to this the fact that the era of very low-interest rates has ended. Returns are no longer fuelled by cheap money and leverage. We need to improve businesses to create value.

In that sense, it’s good risk management to have a robust sustainability approach for private assets. Being well placed for the transition towards a more sustainable society underpins solid company valuation.

But rewards go beyond this. Private companies not only play a significant role in the economy; they are integral and influential in shaping society. If we look at the mid-market segment – using the four largest EU countries as a proxy for European mid-market performance – it represents approximately 140, 000 companies (only 1.5% of the total companies) but accounts for €7.4 trillion in revenue, corresponding to roughly one third of the private sector GDP of these countries, and nearly 32 million jobs[1]. By implementing a more environmentally conscious business model, private companies can help encourage consumer behaviour to change. In short, their sustainability performance matters.

Helping companies to improve their sustainability profile can be done on multiple fronts, where each company has its own unique features, ESG opportunities and risk exposures. Supporting the right companies to make changes to their products and services can help contribute to a more sustainable society. Examples might include producing organic food, making buildings more energy efficient or improving the accessibility of healthcare. With regards to company operations, the focus could be on reducing its carbon footprint, energy usage, water use and waste, and increasing recycling or the use of recycled materials.

Market observations

We see many private companies successfully integrating sustainability in their business models in a number of different ways. A few observations to share:

  • Improvements come from the bottom up – Many improvements are emerging from the bottom up: e.g. machinery that needs to be replaced or expanded. This is often done with the latest techniques according to high standards – e.g. energy- and waste-efficient machinery – which leads to an environmental gain. Although many companies do act, a top-down ESG strategy is not usually in place yet.
  • The closer to doing harm, the more advanced the ESG-strategy – Companies producing products that everybody uses, but with a material harmful footprint on the environment, are often more advanced in establishing and rolling out an ESG strategy, while less polluting companies are often further behind in setting up and implementing a clear strategy. In companies where sustainability is intentionally a key part of the business model, we see deep integration of social and environmental considerations in how the businesses are run.
  • Saying is easier than doing – We see a lot of willingness to improve across the board, not only with private companies. However, concrete actions to drive change come with long term investments and – in the end – these need to yield financially as well. The proof is in the pudding.
  • To do it well, boots on the ground are crucial – For investors, the difference between theory and practice is key to understand and appreciate that:
    • The availability of recycled material is in some cases a bottleneck in a fully circular approach (reduction of material use remains key). For example, there is a shortage of recycled paper (probably because we read less newspapers), yet a greater demand for recyclable packaging due to our online shopping habits.
    • Net zero plans are still often absent, because the question of ‘how’ cannot be answered yet. Once mid-market companies have developed a net zero strategy, this is likely to be truly meaningful since it’s an example of decarbonisation in the real world (compared to a net zero portfolio where high emitting companies are sometimes simply being excluded and with that, hardly any real change is achieved).

Sustainable investing has gained prominence in both public and private markets and has become very important to an increasing number of investors, especially in Europe. Sustainable investing is even more important in the private market as investments can be used to directly affect the real economy and contribute to solving pressing ESG challenges.

Better results for all stakeholders

There is fulfilling work to do within private companies, and investors have their role to play. It’s hard work to walk the talk but supporting companies that are well placed to contribute to the transition to a more sustainable society yields better results for all stakeholders.

[1] Source: EssecBusiness School & GE Capital Research –The mighty middle –Europe, S&P LCD

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