Last updated: 05:13 / Thursday, 9 June 2022
Opinion by Unigestion

The Role of Private Equity In Meeting the Climate Target


The race to net zero has begun and the world as we know it has started to change. Countries, cities and companies have committed to reducing their greenhouse gas (GHG) emission footprints, which shows that climate change is no longer the mere concern of environmentalists and NGOs.

From companies meeting the demands of shareholders through to consumers opting to buy organic products and switching to a more sustainable lifestyle, increased awareness of climate change has created a new market environment. The role of financial services to provide capital has thus become more important than ever to drive this transition to a net zero economy and reduce pressure on natural resources. In particular, private equity will play an exceptional part in this transition, a responsibility that we welcome at Unigestion.

The Climate Change Tailwind

As a longstanding private equity specialist, Unigestion recognises not only its responsibility to address climate change as a risk but to seek interesting financing opportunities in the climate impact sector. Climate Impact Finance refers to transactions that address climate change, shifting society and business activities to a low-carbon and climate-resilient economy – in line with the 1.5°C target. To achieve this goal, business-as-usual models that are largely dependent on the unsustainable consumption of resources, pollution of our environment and use of fossil fuels such as coal and oil must change. Critically, the private sector will play a crucial role in achieving this goal. While governments provide the political frameworks to implement changes, innovative business models will originate from the private sector. 

Unigestion has identified three significant areas which highlight the role of private equity when addressing climate change and environmental concerns in the market:

1. Entrepreneurship: Structural change across industries and technological innovation in the sustainability space is driven by entrepreneurial growth typically rooted in private companies.

2. Flexibility: Private companies have high control over decision processes and are more agile in implementing change.

3. Innovation: Developing solutions to replace "brown" technologies or environmentally harmful products requires innovative thinking and private companies are equipped to drive innovation in business models/services.

Unigestion’s private equity team leverages 12 years of the firm’s dedicated experience in climate impact sectors (i.e.  energy transition, green mobility, green construction, low-carbon manufacturing, circular material, forestry and land management) to identify opportunities and invest in companies providing important solutions to the climate challenge, ensuring that returns and quantifiable impact will be achieved hand in hand.

To give some examples: 

The Energy Transition sector plays a crucial role in order to pivot away from our dependency on fossil fuels. The capacity of renewables needs to expand further, for which an estimated USD 3.4 trillion of investment is required in order to reach a 55% share by 2030. Thus we target players that will provide solutions to significantly reduce the energy industry’s carbon footprint.

Many of the world’s largest automobile makers have begun to shift their business models towards electric vehicles with the global sales of electric cars rising by 43% in 2020. Unigestion’s private equity team has been aware of the changing landscape for several years and has already built a track record in the EV-charging sector, serving as a base to drive the Green Mobility market.

Can returns and impact go hand in hand?

Unigestion’s private equity team has long recognised the importance of environmental responsibility within its investment strategy, launching its first environment-focused fund in 2010 and an ESG-focused mandate for a large client in 2014. To date, we have generated a 2.7x TVPI and 24% net IRR on realised climate impact deals. We believe the following “green drivers” will lead to outperformance in climate impact investments:

  1. High demand for low carbon solutions: Sustainable products/services are in high demand and have been widely adopted as a substitute for incumbent products over time. 
  2. Pricing power: “Green” products/services can command higher pricing power and margins. 
  3. Lower financing costs: “Green financing” is available at a lower cost for companies with environmental products or services.
  4. Strategic premium: For all the reasons mentioned above, private companies with sustainable products or services will ultimately be in high demand by investors and/or larger companies wanting to increase exposure to climate impact strategies.

Time To Invest Is Now

There is no doubt that the time to invest is now. As with many innovations in the past – such as the Internet, cellular network or GPS – state support has been instrumental to drive early growth. However, the current investment landscape has matured along with changing consumer behaviour as demand for solutions in the climate sector is only expected to grow. Today, we see a market with more innovation and sustainable business models being launched than ever before and it is our mission to unlock access to these golden opportunities for our investors.

Opinion column by Joana Castro, Head of Primary Investments and Climate Impact at Unigestion.

About Joana Castro

Joana Castro is Partner within the Private Equity team where she is Head of Primary Investments and Climate Impact and is responsible for ESG integration in private equity. Joana is a member of the advisory board of several private equity funds as well as a member of British Venture Capital Association’s Responsible Investment Advisory Group.