Sustainable Investing “No planet B” in private equity: Impact investing in climate

Private markets continue to be a preferred way for investors to gain exposure to solutions that advance progress toward global sustainability challenges while generating competitive financial returns. Historically, investors who have continued to invest in private companies through prior volatile periods have been rewarded with higher long-term returns.

Climate technologies stand out in the pool of opportunities, with over USD 53bn invested in these solutions across private markets alone in 2021. Last year saw 28 unicorns (or startup companies valued at more than USD 1bn) across the spectrum of growth stages. Infrastructure investments in renewables, electric vehicle stations, and solutions for the circular economy are also on the rise. While not all of these transactions find their way into dedicated impact investing strategies, they illustrate the momentum behind environmental solutions more broadly.

While encouraging, some of these developments might create concerns, especially for those recalling the so-called “cleantech bubble” of the mid-2000s. In our view, strong fundamentals around sustainability drivers, capital flows, and exit opportunities differentiate the current environment and continue to make climate tech an attractive space for private equity investments.

The transition to a low-carbon economy will likely continue to drive regulation, consumer sentiment, and corporate response. Increased regulatory scrutiny around climate reporting, including the most recent regulatory moves we describe above, should favor environmentally focused companies. Net-zero commitments can shape investment priorities in the post-pandemic economic recovery and energy security in the light of the war in Ukraine. In 2021 alone, USD 755bn globally were spent on deploying low-carbon energy technologies.

Decarbonization is hitting the fundamentals of corporate operations, prompting companies to be more efficient with their energy consumption and more careful about their carbon emissions. Corporate investments should continue to fuel the demand for environmental technologies. Investors, too, recognize the momentum for climate tech, with USD 165bn raised to finance companies in the space in 2021—a third of it coming from private equity and venture capital alone. The industry has also shown its potential for exits: A wave of IPOs in 2021 was complemented by SPAC reverse mergers. And while broader clean energy indexes have suffered a setback in 2021, their performance over the longer term remains competitive.

Naturally, “climate tech” is not a proxy for the entire impact investing space. Careful selection of technologies is important not only to address market opportunities but also to direct capital to the most effective solutions within resource efficiency and low-carbon energy. Intent, measurement, and verification, in our view, are the key considerations underpinning investment decisions in the impact space.

Takeaways for investors:

• Private market investments can be an effective way to gain exposure to climate technologies and broader environmental solutions. A majority of such solutions lend themselves to the growth equity and buyout segments of private markets, which continue to show competitive returns.
• In our view, the transition to a low-carbon economy continues to be an attractive investment opportunity, powered by sustainability drivers, capital flows, and opportunities for exit.
• Strategy and manager selection remains key in both private equity and impact investing. Investors need to be able to assess not only the potential to generate financial returns, but also to drive impact outcomes across the portfolio.

Read the full report, Sustainable Investing Perspectives: SEC and EU regulatory update, climate impact investing, a step toward global standards, 12 April 2022, which also discusses ESG regulation updates and Steps toward global alignment on sustainability-related standards.

Main contributor: Amantia Muhedini

This content is a product of the UBS Chief Investment Office.