By Peter Dunbar, CFA, Senior Specialist, PRI and Simon Whistler, Senior Specialist, PRI
Today we launch our Climate Hub for Private Markets on the PRI website. The hub will provide private market investors with easy access to key tools, guides and insights to support their actions on the path to net zero and on building more resilient companies and assets.
We launch this resource at a time when private markets are becoming increasingly important in the financial ecosystem. While it’s difficult to put a precise number on it, PWC estimates that AUM in private markets now stands at $9.5tn. McKinsey estimates the size of private markets are around three times what they were in 2010. Moreover, institutional investors are gradually increasing their portfolio allocations to private markets and in 2019 allocated nearly 12.3% of their assets to private equity and infrastructure, an increase of 24% since 2008.
This growth trend is set to continue, with projections showing a further increase to an AUM of between $14bn - $15bn by 2025.
As the overall size and importance of private markets grow, so do some of the often voiced concerns. For example, as public market investors come under increasing pressure to divest from and limit future investment in fossil fuel assets, some fear that those assets will find their way into private markets.
How worrying are these concerns? Historically, private equity energy sector investments have predominantly been in fossil fuels rather than renewables. Similarly, for many core infrastructure investors, assets such as pipelines, toll roads and airports have long been staple investments. However, some context is required here.
While fossil fuel energy projects financed by private equity were around $150bn in those ten years, the amount of capital raised in the private equity industry was around $4.5tn. Bain estimates that only around 5% of private equity buyout AUM is invested in energy, both renewables and fossil fuels.
Whilst there is rightly some concern around private market funding of fossil fuels, it’s important to remember that private market investors are also increasingly crucial in financing renewable energy projects. According to new research by Fitch, there is increasing interest in doing so: 2020 was a record year for private equity funded renewable projects with $11.3bn invested in them.
Driving change in the private equity industry
Private markets clearly present both climate change risks and opportunities.
The PRI supports its private market signatories and the broader industry on climate issues in various ways. For example, we are supporters of Initiative Climat International (iCI), a GP led climate initiative that is now 106 private market investors strong with a combined AUM of $758bn. iCI houses many GP-led working groups with participants all collaborating together to produce climate-related guidance or tools.
We support iCI as we feel it’s a genuine vehicle for driving change in the private equity industry. Members commit to integrating climate change analysis into their investment processes and to actively engage with portfolio companies to reduce greenhouse gas emissions.
Many other initiatives with a climate-related mission are also starting work in private markets. For example, CDP initiated a private equity pilot this year, and CERES recently released a report focusing on climate and the private equity sector. Several major infrastructure investors are members of the Net Zero Asset Managers initiative, while the asset class also recognises the role it has to play in adapting to and mitigating the physical impacts of climate change, through the work of bodies such as the Coalition for Climate Resilient Investment. In real estate, many institutional investors are signatories to the World Green Building Council’s Net Zero Carbon Buildings Commitment.
These are just examples of a growing ecosystem of initiatives working on climate-related issues with the private markets asset class. The growing attention on it is positive, but those working in this field need to ensure they work together efficiently and effectively. The importance of the topic calls for collaboration and openness. A competitive spirit needs to be resisted, and good communication and organisation across those involved are required.
While leaders, such as those involved in iCI projects, are forging the way ahead, many firms around the globe are yet to take action. There are perhaps as many as 11,000 firms active in private markets, and there are large sections of that fragmented market that need or will need more basic information and guidance on the topic.
Our intention for the hub is to be the central point of information for all the vital information and guidance related to climate and private markets. In particular, we aim to position it at most of those in the industry that are not leaders in the climate space.
We hope that signposting these initiatives, stakeholders, and guidance on the PRI’s Private Markets Climate Hub will help those in the private markets industry navigate and understand this ecosystem better.
This blog is written by PRI staff members and guest contributors. Our goal is to contribute to the broader debate around topical issues and to help showcase some of our research and other work that we undertake in support of our signatories.Please note that although you can expect to find some posts here that broadly accord with the PRI’s official views, the blog authors write in their individual capacity and there is no “house view”. Nor do the views and opinions expressed on this blog constitute financial or other professional advice.If you have any questions, please contact us at firstname.lastname@example.org.