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Private Equity Faces Demand For Sustainable Investing In Emerging Markets

Claire Meier Underhill

Investors are listening to clients and trying to offer investable answers to their growing climate change concerns. Now that the case for sustainable investing is widely accepted, much focus is centered on the practical aspect: How do asset managers define criteria and measure performance and where does making money fit into doing all this good?

The Emerging Market Private Equity Association (EMPEA) Sustainable Investing in Emerging Markets Summit explored these practical questions and more, over days of panels, discussions and a Masterclass in London this month, though the answers remain as varied as the 17 Sustainable Development Goals (SDGs) the United Nations debuted in 2015.

There is no arguing that public asset classes and investors are increasingly looking for ways to invest in sustainable products. Products targeting ESG or the SDGs grew 38 percent over the last two years in the US according to the Forum for Sustainable and Responsible Investment (US SIF) shows data topping $12 trillion. In the UK, almost 26 percent of fund assets tracked by the Investment Association are managed to some form of responsible investment criteria now, an increase of 18 percent since July 2018. (Source: Investment Week, Surge in eco-awareness driving ‘most significant’ period of ESG inflows, 23 September 2019)

EMPEA’s Sustainable Investing Summit confirms that private market investors are trying to invest sustainably as well. Over 300 delegates from the GP, LP and SP community participated in the week-long roster of events focused on hashing out the practical aspects given the motivation, is already firmly entrenched.

However, both private and public markets face the same struggle of marrying the desire and demand for ESG compliant or impact-supportive investments with commercial returns. Panelists suggested that it can’t be an either/or decision. Sustainable investors will have to lead the development of a culture that does not slice the commercial return away from the ESG return. The increasing demand for ESG compliant funds suggests that clients are already moving along that spectrum and changing what expected returns encompass.

Challenges remain before returns are even realized. Summit participants often noted that there are not enough attractive and compliant sustainable investment opportunities to satiate demand. This heightens the risk of ‘greenwashing’ and inflated valuations. The flip side is that it also creates a drive from the GP and the LP community for a more widely accepted measurement framework, accelerating already ongoing work.

There are many guidelines and protocols that funds can be signatories to but there is still lacking a widely accepted conceptual framework and measurement metrics. With the formalization of such a measurement or regulatory environment, like-for-like comparisons amongst funds could help secure the veracity of investment thesis and diminish ‘greenwashing.’

The field is crowded though. And while there are high levels of harmony among the various ESG measurement or guidelines, there is still a need for a singular and universal measurement tool. The development of such a measure will likely be a marker for the permanence of ESG-based investing in both private and public markets.

The level of dialogue and the sheer number of participants focused on sustainable investing from a niche asset class such as private equity and its targeting of specific geographies–the emerging and frontier markets–also points to its burgeoning power as a major investment thesis.

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