Last week I was privileged to attend the Equilibrium Capital Sustainability Forum.  The Forum, in its 8th year, brings together Limited Partners (LPs), General Partners (GPs), Consultants, and other thought-leaders to dive deep into how Sustainability is rapidly changing the real asset investment landscape.

This year’s agenda focused on the most important trend in ESG today: Monetizing Sustainability.

My two biggest takeaways

  • First, the debate about whether there is a tie between ESG factors and the financial performance of a fund is over. ESG is a proven methodology of generating alpha and controlling risk.
  • Second: there is a growing gap in the GPs ability to harmonize the data necessary to prove how it uses ESG to drive financial performance across a fund. Winners are creating a competitive advantage for themselves; those putting it off are increasingly at risk.

My bold prediction?

As early as 2020, GPs who cannot drive a numbers-based discussion around how they generate alpha and manage risk using ESG across a fund’s lifecycle will struggle to raise capital in a world where sustainability is mainstream.

Let me briefly highlight examples of ESG & Financial correlation presented at the Forum:

  • Equilibrium discussed its focus on lifecycle thinking – like building “Saudi-Style Barns” that lower energy and water usage, and Anaerobic Digesters to convert waste to energy, across its agriculture portfolio. These techniques have directly improved returns, while providing benefits to the animals and workers alike.
  • One of PWC’s Partners, Malcolm Preston, and the team from Y Analytics presented industry-leading research techniques that quantify the financial AND non-financial impact of various ESG-based investment strategies across Private Equity.
  • Numerous examples of how corporate business models that are too myopically focused on near-term profits are being shocked by rapidly shifting consumer-spending habits. (Starbucks’ $22M self-imposed ‘fine’ was an expensive way to buy back buyer trust in the UK).

There were numerous deep dive conversations with attendees over the two days.  Perhaps the most interesting centered around the ever-popular model for the “Diffusion of Innovation Theory” (shown below):

This pattern has played out 1000 times and is repeating itself once again.

First, Innovators educated the market on the importance of incorporating ESG thinking into the investment process as a way of creating value and mitigating risk.  The niche saw success – meanwhile examples of negative results suffered by those who failed to effectively consider changing environmental or social factors continued to emerge.

Soon came Early Adopters.  More activity brought more structure – including standards for designing ESG programs or measuring and reporting outcomes.  ESG found its way into regulatory discussions and other political arenas.  Of course, this has created a lot of noise, and LPs seeking to invest in the sector have been frustrated by “greenwashing” – firms trying to present a greener version of the truth.  Broadly, however, momentum has continued to grow.

We are now entering the Early Majority Phase.  The trend has become mainstream.  Countless pragmatists who watched the sector from the sidelines are convinced that incorporating ESG practices will help them mitigate risk more effectively, improve portfolio yield, and – perhaps most importantly – raise capital more efficiently.  And the “Greenium” investors will pay for proven strategies seems to be rising – from 5 bps, to 10, and I believe far more very soon.

So, what lies ahead?

Equilibrium’s Forum Theme was spot on: we’re in an era of monetizing sustainability.  Unfortunately, so few can achieve this at scale and create the traceability the LP’s crave to back them.

What do I mean?  Imagine driving a fundraising discussion with a visual like this, which harmonizes financial, operational, AND ESG data to showcase holistic impact.  What if you could, in real-time, run scenarios showcasing new financial and non-financial return profiles incorporating different potential investment strategies, thus partnering with LPs to structure optimal portfolios.

For some, this “vision of the future” is a reality today.  Today’s leaders are already showcasing to LPs how ESG factors have directly contributed to higher EBITDA multiples and improved terminal value across their funds, and these GPs are increasingly winning wallet share by doing so.

Now take a look at your own sustainability reports and ask yourself: how many dollar signs are there?  Can you use data to prove the correlation between your ESG efforts and higher returns?

What will this mean for your fundraising efforts next year?


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