Impax’s Gray: ‘The bar for attracting new capital is extremely high’

Rhiann Gray, head of commercial asset management and ESG for the private equity and infrastructure team at Impax Asset Management, gives her view on the state of the market as part of our mid-year series of Q&As.

Has the political backlash against ESG affected your business? How do you feel about it?

In short, no, we haven’t felt the effects of this backlash. This is because the New Energy Strategy is fundamentally commercially driven and focused on seeking to achieve superior risk-adjusted returns. We use ESG as a tool to evaluate the risks and opportunities associated with our investments and deliver on our fiduciary duty to provide LPs with competitive returns.

The PE/infrastructure team have recently broadened our ESG analysis, expanding on the environment, social and governance pillars to also assess companies on climate change and a deeper focus on human and labour rights, as we believe these are relevant issues for all companies.

As our CEO Ian Simm and president Joseph Keefe wrote in a recent blog: “Any attempt to limit investment opportunities by politicising investor choice is not a market-based approach and in our view would lead to lower financial returns over time. Restrictions on ESG analysis amount to a limit on investment freedoms – and an assault on common sense.”

The impact investing market is scaling up and going mainstream – how is this affecting your business?

As the sector grows, we are seeing increased interest from more mainstream investors. However, as newcomers enter the market, we have seen some confusion around key terms. Impax believes it is important to make a clear distinction between impact and ESG. Impax conceptualises ESG as a risk mitigation and value creation framework, whereas impact is described as the positive and measurable impact that has occurred as a direct result of an investment.

For example, we have been working closely with our portfolio companies to address human rights and forced labour risks in solar supply chains, helping them to engage with their suppliers and complete detailed due diligence.

While we certainly hope this work will have a positive impact on the solar industry and society more broadly, the key objective here is to mitigate risk and create value by enhancing supply chain transparency and working with competent suppliers. This distinction is important to maintain so that the industry does not fall foul of making broad claims about changing the world without clear evidence.

Simply put, correlation does not imply causality. Just because a manager integrates ESG or invests in a sector that is considered ‘green’, does not mean their investments are creating a positive impact. This is where we see the New Energy strategy differentiated in the market. Rather than purchasing operating assets, we take assets into and through construction. This brings new renewable energy capacity into the grid, thereby displacing fossil fuels and creating a measurable positive impact that can be directly attributed to our investments.

Do you use benchmarks to evaluate your impact and why (or why not)?

Based on our precise definition of ‘impact’, the New Energy strategy tracks three impact-specific metrics:

• (i) The number of MW of renewable energy projects in development, construction and operations
• (ii) The number of MW of renewable energy generated
• (iii) Greenhouse gas (GHG) avoided

As such, we do not feel the need to use a third-party benchmark as we benchmark our results against previous years and business plans, which enables us to track the portfolio’s progress over time.

Furthermore, setting specific GHG reduction targets against a benchmark can be misleading. For example, as renewable energy uptake increases, we are seeing the carbon intensity of local grids decrease. This means that the amount of GHG avoided will not necessarily increase in line with the amount of renewable energy produced.

Although 1GWh of renewable electricity produced in 2023 was just as ‘clean’ as it was in 2007, the improvement in comparison with the European power network is smaller, as renewable energy penetration is higher.

Ultimately, this is good news as it is the evidence of the strategy’s investment thesis playing out (ie that use of environmental technologies will become more commonplace over time as they are adopted by companies and individuals globally to reduce their pollution and tackle the causes of climate change).

How would you characterise the fundraising market in H1 2023?

The fundraising environment has continued to be very challenging in H1 2023, following on from a slowdown that began in 2022. Investors are generally capital constrained, largely due to the denominator effect and limited capital being returned to their private markets portfolios as a result of a sluggish exit market.

The bar for attracting new capital is extremely high, with all managers looking to employ the same ‘tricks’ to lure in new investors, with fee discounts, co-investments and secondaries opportunities flooding the market.

Additionally, there has continued to be a trend of managers coming back to market much quicker and with bigger funds, putting additional pressure on investors who do not have the capital resources to re-up into as many managers as they may ideally like to. As a result, investors are constrained by both a lack of time and capital for new investments.

All that said, renewables has been a standout sector in terms of being able to continue to attract investor capital, remaining high on investors’ priorities lists. We have also been seeing a number of new allocations available for renewables and energy transition funds, aside from traditional infrastructure allocations.

We have seen a number of new and emerging allocations for impact and climate focused funds as well as investors seeking funds with a certain percentage of EU taxonomy alignment or specific SFDR classifications (typically Article 8 and above). Renewables and energy transition funds are well positioned to benefit from these new pockets of capital.

Overall things look a bit brighter for H2 2023, though time will tell!