Matteo Squilloni, the new head of climate transition equity investments at the European Investment Fund, has a novel idea for assessing managers’ true commitment to sustainability: “I think a funny way to identify greenwashing would be to go into the kitchen of private equity managers and look into their bins,” he tells New Private Markets.

Squilloni is joking of course, but the point he is making is serious: he wants managers of EIF capital to be personally committed to sustainability. “What’s in there? Are they buying sustainable food? Recycling? Using plastic? You need to care first before being able to deploy a decarbonisation fund. Otherwise, when you speak to an entrepreneur, you won’t be able to understand if he/she is at the same level as you and the one ready to follow you in the decarbonisation challenge.”

Squilloni’s new position is an important one in European sustainable investing. EIF is part of the European Investment Bank Group, and specialises in financing SMEs across Europe to promote EU objectives. As a consequence, it is a prominent allocator to sustainable and impact funds: 30 percent of the €9 billion deployed in 2022 – over €4 billion of which was in private markets – was focused on sustainability and the green transformation, according to its annual report. It has made commitments to Sustainable Development Capital’s Green Energy Solutions infrastructure fund, Partech Growth Impact and Fund and Infinity Plastic’s Circular Plastics Fund I, among many others.

The climate transition arm that Squilloni now leads is responsible for three areas: the decarbonisation of generalist industries; downstream electrification such as e-mobility and smart cities; and regeneration of soil and biodiversity. The programme does not have a specific returns target, though EIF’s website says providing an “appropriate return” to shareholders is a statutory objective.

Squilloni describes the mandate with relish: “We had an industrial revolution, followed by a digital revolution; we are now most likely living through the sustainability revolution. We are trying to cure the world. It is nice being part of this important transition – it makes me very happy,” he says.

Decarbonisation

Decarbonising the real economy has been moving up the private markets agenda, with a number of GPs now marketing strategies that prioritise transitioning assets from brown to green. Mid-market firm Argos Wityu, for example, launched its Climate Action Fund last year with a formal target to reduce its portfolio companies’ carbon intensity by 7.5 percent per year. Large-cap firms are also paying attention to the trend; KKR, for example, has identified the decarbonisation of industry as a key investment theme of 2024.

Squilloni’s new vantage point allows him a clear view of the latest strategies on the fundraising trail. “Not all the decarbonisation funds coming to market now are necessarily vertical,” he says. “Some are more upstream and significantly targeting electrification, climate action enablers or regenerative practices; however, many others remain generalist but follow value creation strategies that are strongly targeting reduction of GHG emissions, responsible consumption or sustainable production.”

As decarbonisation products become more popular, the challenge for EIF is identifying the managers that have a genuine commitment to the cause. “One of the main things we need to differentiate now in the market is whether decarbonisation is being used as a marketing tool or whether there is a genuine interest from the manager and the right expertise to execute the promises.

“Identifying the greenwashing is becoming more sophisticated for us and the major investors in private equity,” Squilloni continues, “Nice marketing presentations are less effective than a few years ago – genuineness of the approach is key today.”

Beyond a personal passion, GPs need to show they have the requisite expertise to put their plans into action. Squilloni says: “Technical knowledge is very important. When assessing a decarbonisation fund, you expect to have in front of you professionals that know what they are talking about, that are able and happy to discuss and be challenged on the details of their ways to decarbonise. Scope 1, 2 and 3, strategies can be different, and all may make sense. Having in front of you people that know what they’re talking about and care is what you want to see.”

Regeneration

Squilloni’s department is also responsible for investments that seek to regenerate soil and biodiversity. “Looking ahead to the next decade, the top four global risks listed by the World Economic Forum Global Risks are intricately tied to ecosystem and biodiversity,” he notes, these being extreme weather conditions, critical changes to the Earth system, ecosystem collapse and natural resources shortage.

Under the regeneration heading, EIF has made a number of investments in agriculture and agritech. It has also been allocating to blue economy funds: over the last two years, EIF has invested €28 million into Growth Partners Capital’s first blue economy fund, which invests predominantly in Portuguese SMEs in the space, as well as a €30m commitment to PureTerra Ventures I, a Dutch fund focusing on impact-driven companies improving water usage, treatment and conservation.

Moving forward, Squilloni sees the food and beverage sector as an area ripe for sustainability-focused strategies. He explains: “There are food specialists in the private equity industry, in the same manner as there are industrial specialists. What we are trying to do with the industrial specialists is to encourage them into becoming industrial decarbonisation specialists, and we are planning to do the same with the food and beverage specialists becoming specialists of sustainable and innovative food, regenerative agriculture practises and preservation of biodiversity”.