Stanley Kwong, Principal– Sustainable Investing, KKR
Eimear Palmer, Partner and Global Head of ESG, Pantheon
Denise Odaro, Managing Director, Head of ESG & Sustainability, PAI Partners
Tom Eagar, Consultant, Head of ESG and Sustainability, Sheffield Haworth
Keynote Panel Discussion: A Spotlight on ESG & Impact Investing.
Maria Merry del Val (Moderator): To start, I’d like to clarify the definitions of sustainable investing and impact investing because people understand sustainable investment differently; let me briefly read out these definitions from the UNPRI. Sustainable investing refers to the investment implications of environmental, social, and governance (ESG) factors, incorporating them into investment and ownership decisions. And impact investing, as defined by the GIN, involves investments made with the intention to generate positive, measurable social and environmental impact alongside financial returns. Now, let’s move on to our first question: How successful has the industry been in realising real impact within this new wave of sustainable capitalism? Is this something you’re seeing in your decision-making processes?
Emma Palmer (Head of ESG at Pantheon): Thank you for the question. I’ll start by saying that the success in realising real impact has been limited. Many funds in the market are still small and subscale, making it challenging for institutional investors to access meaningful impact opportunities. Indirect investors like Pantheon can help by aggregating smaller funds and providing a platform for access. We’re also seeing mainstream managers extending their platforms into impact investing, which may boost investor confidence. However, the most real impact is currently found in these small funds. To distinguish between impact and sustainability, we consider impact investments to have a direct positive social or environmental impact for every unit of product or service sold, with financial returns closely tied to this impact. Sustainable investments may meet sustainability criteria but often don’t create a broader impact.
Denise (Pai Partners): I’ve been at the forefront of ESG, coming from a background at the World Bank. The distinction between impact and mainstream sustainable investing has been a long-debated issue. Impact investments often focus on outputs, as the final outcomes may take time to materialise. Mainstream investing is evolving to incorporate sustainability throughout the financial product value chain. However, SMEs face regulatory burdens, and the industry needs to work on regulations fit for private markets.
Tom (Sheffield Haworth): “I work with ESG managers, and there’s a growing emphasis on ESG in private equity. Teams have expanded, and are beginning to become more specialised. Data privacy is a challenge, as there is a tension between sharing the non-financial data that makes up ESG evaluation, and the alpha generating ‘secret sauce’, so people with stakeholder management and project management skills are essential to drive value creation. I’ve observed a shift towards taking ESG more seriously in private equity. Hiring for ESG roles has increased, but it’s essential to have people who can engage with portfolio companies effectively. Regulation is complex, but it brings consistency and clarifies definitions, helping engagement with companies. SFDR and UK funds aim to provide more clarity.
Maria Merry del Val (Moderator): Is current regulation fit for impact players and investors looking for a positive impact?
Stanley Kwong: Regulation brings complexity but also consistency. It sets the framework for engaging companies on material ESG KPIs and targets.
Current regulations are still evolving and may not be entirely suitable for impact players. Collaboration and amendments to regulations are needed. Regulations can bring complexity but also consistency and clarity. The focus should be ensuring that reporting and data make sense to investors.
Maria Merry del Val (Moderator): Do you foresee any trends or changes in ESG and impact strategies in the next two to five years?
Tom: Leadership in ESG will shift towards managing people and eventually teams with more specialised roles with a particular focus on portfolio companies and their specific needs. Organisational structures may evolve to include specialists for managing and working with portfolio companies, organised on a sector specialism basis, roles focused on the broader commercial and product strategy and better integrating ESG into investment and due diligence.
Maria Merry del Val (Moderator): Is monetisation a reality in sustainability and impact?
Stanley: “Monetisation is emerging, especially in areas like climate. It’s not yet the top priority, but it’s gaining traction. Currently, the focus is on what can be achieved with existing mechanisms like loans, negotiations with companies, and margin ratchets. While monetisation is emerging in certain areas, it’s still in the early days for the industry.’
Tom Eagar was invited to take part in the panel discussion by the Markets Group, the organisers of the Private Equity Forum. Please contact Tom here if you would like to discuss any of the themes in this article.