Private markets firms will turn their attention to nature in 2023

Among the most significant emerging themes in sustainable investment is natural capital. It is arguably the next focus area, after greenhouse gas emissions, for investors who want to understand the risks and opportunities arising from climate change to future-proof their portfolios.

“As climate change has become an investment theme, we have seen how re-ratings have hurt some assets and helped others. We expect nature to follow a similar path,” wrote StepStone Group in a paper last October that urged LPs to “lean in” to the nature opportunity.

Private market GPs realise this and are starting to take steps.

“Nature creates significant value,” says Natasha Morris, managing director, responsibility and impact at Australian private equity firm Adamantem Capital, “but up until recently nature’s ecosystem services have been considered ‘free’, with businesses yet to widely understand how significantly their operations and supply chains may be affected by a reduced natural environment.”

“As with climate change, the private sector has a critical role to play,” continues Morris, writing for New Private Markets as part of its Agenda 2023 series.

Private equity firm PAI Partners is one example of a firm that is incorporating natural ecosystems into its diligence, says Denise Odaro, head of ESG & sustainability at the GP: “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.”

Multi-strategy firm Partners Group is “looking into” ways of integrating it into its processes, says head of ESG and sustainability Carmela Mondino, “but for now we are focusing on reducing our contribution to climate [change]”.

Materiality matters

Ares Global Management includes biodiversity and nature loss – where material – among the environmental risks in its broader ESG due diligence, says Adam Heltzer, global head of its ESG group. “As a firm, we are also monitoring initiatives such as the Taskforce for Nature-related Financial Disclosure (TNFD) and the UN Biodiversity Conference (COP 15) to stay close to emerging trends on biodiversity as they evolve,” he writes.

It is also a question of materiality for private markets firm Permira. “There are some companies in the funds’ portfolio where this is more material,” says Adinah Shackleton, head of ESG. “For example, we have recently worked with a company on actions around responsible sourcing, which has implications for biodiversity. We have also asked certain portfolio companies in the buyout funds whether they have activities negatively impacting biodiversity-sensitive areas as part of ongoing monitoring.”

For some businesses, typically asset-light tech companies, it is harder to pinpoint the connection to nature. “A large proportion of capital invested by Apax [Partners’ funds] is invested in technology businesses, and for these companies biodiversity is not an issue which they currently can actively impact through their operations,” says Ellen de Kreij, ESG practice head for the firm.

It is a thought echoed by tech-focused firm Hg’s chief sustainability officer, Caroline Löfgren: “In 2023 we are keen to understand what biodiversity means specifically for the technology sector.”

Real assets

While the relationship between a technology company and the natural world can seem obscure, the connection between infrastructure and real estate assets to their surrounding environment is easier to visualise.

“Biodiversity- and nature-positive opportunities are a big focus for Actis,” says Shami Nissan, the infrastructure firm’s head of sustainability, who links the topic into the wider theme of the “just transition” and notes a case study in which an Actis-backed African wind and solar business implemented a conservation programme for vultures.

“Nature and biodiversity are becoming topics increasingly raised by our investors,” says Rhyadd Keaney-Watkins, head of ESG at Arjun Infrastructure Partners, “and, indeed, are areas [that] we are looking at closely across our portfolio.”

“Biodiversity intersects with multiple other facets of ‘ESG’, including climate, where companies are beginning to explore biodiversity projects as part of their net-zero approach (nature-based carbon sequestration),” Keaney-Watkins continues. “Healthy habitats also underpin ecosystem services, such as improved flood protection and air quality. Ecosystem services will be an important tool for businesses in improving the climate adaptation and resilience of assets.”

John Laing, another infrastructure investor, includes nature impact in its annual ESG questionnaire, according to head of sustainability Sandrine Lalmant. “For some of our projects in roads and wind power, biodiversity is already included in our action plan,” she notes. “For example, we have a renaturation programme in a bird sanctuary, an agreement with a biodiversity conservation trust, and we support reforestation programmes.”

The way forward

EQT is also collaborating with peers through the Private Equity Sustainable Markets Initiative Taskforce to “explore and accelerate efforts around integrating biodiversity further into decision-making”, says Tang Zongzhong, head of sustainability at BPEA EQT in Singapore. The firm has also set up “an internal taskforce to drive actions and build expertise on the topic”.

Adamantem is planning to extend its existing due diligence framework, which already includes TCFD-aligned climate risk and opportunity assessments, to include nature risk and opportunity assessments “where material”, according to Morris.

Apax will start “signposting” the topic with all portfolio companies and “start working with those companies where engagement on biodiversity can substantially move the needle”, says Apax Partners’ de Kreij.

Private equity firm Bregal Investments is considering how to align its “existing ESG with the emerging recommendations of the TNFD”, says Alvar de Wolff, managing director, head of ESG and responsible investing at the GP.

From risk to opportunity

Just as with the climate mega-theme, the flipside to risk management is investment opportunity. Among the early movers in this area is Bregal. “The opportunity is clear,” says de Wolff. “Corporates with ambitious climate and nature strategies are increasingly seeking opportunities to invest in high-quality nature-based solutions, and other climate technologies, to support decarbonisation strategies and move towards a nature-positive economy.”

Bregal established an impacting investing platform last year, Bregal Sphere; its first investment was in PUR Projet, a French company that specialises in carbon insetting services through agroforestry and environmental projects.

Another firm positioning itself for nature-related opportunities is Schroders Capital. The firm has invested in NatCap Research, which helps organisations measure nature impact, and launched – in partnership with Conservation International – a natural capital investment firm in Singapore. Amara Goeree, Schroders Capital’s sustainability director for private equity, places the expansion of “internally managed nature-based mandates” among her four top climate priorities for the year ahead.

The way the wind is blowing

While firms may be at different stages of advancement when it comes to integrating nature into their investment processes and propositions, there seems to be consensus around the direction of travel.

“Nature and biodiversity are intertwined with climate engagement in so many ways,” says Apax’s de Kreij. “It is very positive that biodiversity is now moving up the agenda as a topic [that] private markets investors should be focused on.”

“It’s an area which may previously have been seen as less material to the sectors Permira focuses on,” says Shackleton, “but I can see it’s quickly moving up the agenda”.