Denise Odaro, head of ESG & sustainability at private equity firm PAI Partners, reflects on the past year and looks forward to 2023.
Looking back at 2022, were there any pivotal events, moments or developments in terms of sustainability in private markets?
There have been several pivotal events with the onset of covid-19, the “Black Lives Matter” movement and, more recently, the Russian invasion of Ukraine that have brought about more of a focus on the “S” within ESG. I would offer that there has been a fundamental shift in investor sentiment and knowledge around sustainability.
The makings of this shift have been developing over the past few years. However, this year LPs have been able to improve and use their ESG knowledge (especially about climate) to put almost as much pressure on private markets as they do on public markets. This has made the private markets think about sustainability beyond what the regulation requires.
Even though there is not much consistency in ESG reporting right now, the EU Final SFDR Regulatory Technical Standards and the EU Green Taxonomy are huge steps towards industry alignment. These classifications and disclosures should provide some clarity in the communication of sustainability performance and reporting.
Thinking specifically about private markets, do you think the industry has made progress on climate in the last year? Where are the bright spots?
A main highlight over the last year has been the ongoing shift toward considering ESG and climate solutions as opportunities to create value, rather than just as ways to manage risks. Asset managers are starting to see the strategic investment value of new climate solutions, but VC and growth equity firms are seeing it the most. This has led to a recent wave of investments in climate technology, which will account for more than a quarter of all venture capital funding in 2022 ($15 billion–$20 billion per quarter).
Also in the last year, SBTi decarbonisation targets have been widely used in private markets. Currently, 15 private equity GPs have SBTi validated targets, which is more than double the number in 2021. This is a big step toward the goal of halving global greenhouse gas emissions by 2030.
Where has it disappointed?
With such determined focus on climate change mitigation, many social topics have lost the traction they gained during the pandemic. Diversity & Inclusion is still a highly discussed topic, but has seen less progress in 2022 than is ideal. Particularly, gender and racial diversity at executive and board level has been slow to improve compared to public markets. Four times more private companies have fully male boards than public companies.
Also, lack of climate reporting consistency currently inhibits efforts to fully comprehend and benchmark sustainability performance among private markets. Emerging regulations, such as the SFDR, should help bridge the gap, as well as some ongoing market collaborations to converge reporting and standardise KPIs.
Looking ahead to 2023, what is your firm’s next priority in terms of the climate? What would you like to have completed over the next 12 months?
Setting a decarbonisation strategy is PAI’s key climate focus for the coming year, both at GP and portfolio level. We plan to collaborate within private markets towards industry alignment on climate metrics and disclosures. PAI will also encourage portfolio companies to pre-emptively consider the EU’s Taxonomy disclosures.
Aside from climate, which other areas of sustainability will be prominent on your agenda and why?
Biodiversity and social topics will feature heavily on our agenda. Diversity & Inclusion and employee wellbeing are areas that we will continue to work on critically. We will also be investigating the potential for emerging technology and artificial intelligence to progress ESG analysis and reporting procedures, within the firm’s portfolio and across the industry.
How are more emerging topics like nature/biodiversity occupying your time and resources?
For PAI, biodiversity is a priority; humans and livestock now comprise 96 percent of all mammals on Earth (in biomass). Our intent is to analyse PAI’s portfolio biodiversity impact and to make considerations that will be integrated into the full cycle of our investment process.