Here at Sheffield Haworth we have noticed that, when it comes to sustainability, there is a growing mismatch in the demands (and complaints) of LPs, and what GPs are delivering.
In conversations with Chief Sustainability Officers of some of the world’s biggest pension funds, we hear consistent complaints; GP dealmaking is not across material physical risks (e.g. flooding, fires), social risks (local community engagement and impact) and health and safety. We have heard multiple instances of deals that fail or almost fail to complete due to these oversights, after these issues were picked up all too late by the LP’s sustainability specialists.
Yet, we see GPs consistently letting existing sustainability leaders go and not replacing them.
As one Chief Sustainability Officer put to us “why are private markets so bad at this?”
Talent mismatch
We see this as a symptom of a mismatch in skills and understanding. Historically, sustainability and especially climate specialists and leaders have been experts in the macro; CO2 emissions, global temperatures, etc. Yet, the issues LPs are asking GPs to look at are at an asset and deal level. Sure, climate change increases the likelihood of flooding, but what does that mean for this specific investment? Why should a climate specialist know anything about health & safety?
This then, explains why existing sustainability & ESG leaders are not seen as useful as they were; they are not providing those insights that help more accurately price deals, and above all, get them over the line.
There is still the talent need therefore, yet too few GPs have witnessed experts who can deliver this risk premia evaluation at asset or company level, so they assume they do not exist.
They do, and firms who are quicker to get to grips with this will be at an advantage; they’ll be highlighted as the exception and get better priced deals across the line accordingly.
Author: Tom Eagar
