How do you work out an effective climate change programme in a company with more than 2,500 people? For Ares Management Corporation, it takes “decentralising and democratising the work”, said the firm’s head of ESG, Adam Heltzer.
On stage at PEI Group’s 2022 Responsible Investment Forum: Europe in London last week, Heltzer explained why Ares has created a “community” of employees that is entirely independent from its ESG function. Launched in 2021, the Climate Action Group aims to facilitate firm-wide collaboration on climate-related issues across each of the firm’s investment strategies.
The initiative – made up of around 40 employees across different departments and asset classes – meets annually and holds quarterly check-in calls to discuss emerging ideas and guidance on climate strategy. “Rather than saying, ‘Let’s reach net-zero by 2050, and here’s a very convoluted plan to get there’, let’s get everyone together and plan by asset class,” he said.
With expectations around ESG engagement and data collection ramping up, Heltzer added that there is “a huge opportunity” for the Climate Action Group to “accelerate this work” by sharing best practices across asset classes. The opportunity this holds for the private credit market, which is in the relatively early stages of its ESG journey, is particularly significant, Heltzer said.
There is also a need to co-ordinate better collaboration between equity and debt investors to ensure that decarbonisation efforts have the investee company at the centre, rather than being led by any one type of investor. “Until now the portfolio company experiences this as a series of point-to-point conversations, whereas it needs to be an ensemble conversation,” he said.
Ares – with $341 billion of assets under management across private credit, private equity, real estate and infrastructure – is in a “strong position to form a new perspective on climate action”, he added.
Given the firm’s focus on the mid-market, Heltzer believes the firm has a chance to make substantial progress on net-zero commitments among portfolio companies. “This is a group of companies that are at a point in their journey and growth curve where you’re trying to professionalise a lot of things, so planting this climate change seed in their growth is really important.”
Fossil fuel dividing lines
In the US, where battle lines are being drawn on ESG considerations, Heltzer described how investors are navigating competing pressures around fossil fuel investment. One one side are NGOs and other environmental groups lobbying for private equity to withdraw from fossil fuel investment; on the other are GOP-led states that specifically require asset managers to explicitly not boycott fossil fuel-related investments.
Heltzer said there is a “middle path” for private market players to invest in these assets, “as long as we do so with intention”. For Ares, this means creating an appropriate engagement programme and being transparent around intentions. “Just be honest and explain what you’re doing,” he said.
Asked to predict where the industry would be in five years’ time when it comes to climate goals, Heltzer outlined both a bull and bear case scenario. “The bull case is that by 2027, the entire financial system will be bound by net-zero commitments, every company will have a carbon management and reduction plan and the industry will have a common language around this.”
In contrast, the “bear case”, he explained, would be that the industry continues to take an unco-ordinated approach, where everyone “ends up dancing on the dancefloor to a slightly different beat” in terms of what commitments are being made.
The danger, Heltzer continued, would be if the industry “hits a middle point”, where people feel like we are moving in the right direction and making some progress, but not so slowly to prompt more aggressive policy intervention. “This is where you have the slowest progress.”