While many sustainability professionals are keen to highlight the difference between ESG and impact investing, Megan Starr, Carlyle Group‘s head of impact, sees the lines starting to blur between the two.
The consensus is that ESG refers to how businesses operate with regard to environmental, social and governance issues. Impact, meanwhile, refers to the product or service offered by the company in question and its impact on society or the environment.
The challenge with impact investing, Starr told an audience at the London offices of PEI Group, is that its restrictive definition results in a “very small investable universe” as most companies don’t meet the criteria.
Even “non-impact” companies, however, are now “developing services that are oriented towards sustainability-related issues, because that is a growth market and that matters across a lot of businesses”.
“We’re entering this next phase of private market investing where the ‘what’ matters but the ‘how’ also matters,” she explained. “How are you managing your people, your environmental footprint, how you show up in the world?
“I think we’ve been a little prescriptive with [saying] ‘This is what impact is, this is what ESG is’. The reality is that businesses overall, to be sustainable long-term enterprises, need to focus on how they operate and, if they want to grow, they need to focus on what they do, because the world is changing and if you want to be competitively positioned in the 21st century, you have to be on these issues.”
Elsewhere in the discussion, Starr addressed decarbonisation and the pathway to net zero, and why Carlyle is investing in carbon intensive businesses:
“The easiest way to make your portfolio look like [net zero] is to sell carbon intensive assets and never buy another one. So start buying into sectors that are less carbon intensive inherently like tech. That makes your portfolio look really good on paper. That doesn’t change a molecule of carbon in the atmosphere.
“I want us to be investing in carbon intensive businesses because that’s where you have the biggest decarb potential.”
Despite this, Starr is still in favour of managers setting long-term net-zero goals. Carlyle announced that it is aiming for net zero by 2050 last year.
“We need North Stars,” she explained.