Sustainability: the importance of private markets
Sustainable investments and climate change are two topics which are, this year more than ever, under the spotlight of investors and regulators. Are we finally seeing an acceleration, which can create a real impact?
Sustainable investing is not really something new, with some asset management companies and funds specialising in this area since several decades. However, two things have changed in the last few years: the investor’s sensitivity to the subject and the regulatory framework. Investors’ sentiment, in line with the consumers, has changed dramatically, with the realisation that climate change is real and we need to be aware of the impact of our investment decisions. The cornerstone of the regulatory change came in March last year with the introduction of the SFDR, the Sustainable Finance Disclosure Regulation, requiring for the first time that asset-management companies provide information about their investments’ environmental, social, and governance risks as well as their impact on society and the planet. The regulatory framework took then another step this august with the revision of the Mifid to include clients’ sustainability preferences, an important step to assess and comply with each investor objective when it comes to environmental, social and governance investing.
The results of the regulatory and investors evolution is already visible: the market share of European UCITs funds which take into consideration ESG at different degrees (the so called “Article 8” and “Article 9” funds) has finally passed the 50% mark, even though this is mainly due to the reclassification of existing funds.
Does that mean that we are well on track to produce a real change?
Certainly when it comes to listed securities, funds and fixed income, the level of transparency and pressure is finally here. Nevertheless, the “elephant in the room” are unfortunately private markets. To highlight that the real issue lays in this segment of the investment universe, we just need to look at the data. For example, only in the US, there are over 17,000 private companies with annual revenue of over $100m compared to only around 2,600 public companies with the same annual revenues (source: Capital IQ, February 2021). This means that the large majority of businesses are not subject to any meaningful level of transparency and scrutiny when it comes to sustainability. Looking at CO2 emissions, we get a similar message: according to the Climate Watch of the World Resources Institute estimates, real estate and agriculture account for more than one third of global emissions and we can safely assume that these two assets classes tend to be largely in the hands of private owners. Finally, a large number of private equity, real estate and private debt funds are often out of scope of the Sustainable Finance Disclosure Regulation due to their jurisdiction or size.
How then to make sure that private markets are involved and contributing to a more sustainable world?
When it comes to private markets, the real change will not probably come from a different or more stringent regulatory framework, as the market it is too fragmented and the level of complexity combined with the lack of data would make this approach very difficult. The real change will need to come bottom-up, from the investors. Pension funds and institutional investors are already putting pressure on this asset class also from a sustainability perspective, but that needs now to touch also family offices, private investors and even retail clients, which are now slowly accessing this investment universe. Many of us already today when buying a new car or a new real estate asset, we do consider their energy efficiency and the environmental impact of our actions; so we should do when investing in private markets as this will not only do well for the world, but also for our future portfolio returns.
Group Head of Asset Management & Advisory
(source: Monaco Economie (French version))