Morningstar - Q2 2022 - 17

the assets of their plans. If they take off, they
could help level the playing field in terms of costs
for all workers. K
Aron Szapiro is head of retirement studies and public policy
at Morningstar.
Private Markets
Offer Sustainable
Opportunities
Material risks can be
addressed while
companies are young.
Jon Hale
SUSTAINABILITY MATTERS
It also makes sense because of today's heightened
public expectations for companies to meet the
needs of all their stakeholders and embed
sustainability into their long-term business models.
A company that addresses material ESG risks
and opportunities early, before it goes public, may
find it a more efficient use of resources than
having to confront them once it's grown into a
larger more complex organization. As a result,
more private equity funds are evaluating
how their portfolio companies are handling
material ESG issues.
As for investors in private markets, they are much
like investors in public markets when it comes
to sustainability. For one thing, all private-market
investors are also public-market investors.
And if they are demanding a sustainability lens on
their public investments, why not on their
private investments, as well?
Impact Funds
In 2021, Morningstar subsidiary PitchBook
identified more than 1,800 funds that were
seeking social or environmental impact alongside
financial returns.1
In a PitchBook survey
Not so long ago, but for a few impact funds,
not much was happening in private markets when
it came to sustainability. Today, not only have
impact funds proliferated, but environmental,
social, and governance analysis is fast becoming a
standard feature of private equity and venture
capital investing.
This makes sense because of the need to drive
capital to address pressing problems facing the
world, particularly climate change, natural
resource constraints, and economic inequality.
Private markets offer many unique opportunities
to influence these issues. More-specific impact
themes include clean energy, sustainable food and
agriculture, clean water, access to quality
education and healthcare, and diversity, equity,
and inclusion.
released in October, 55% of general partner
respondents said they now offer impact funds,
and another 16% said they have impact
funds in development.2
Most impact funds are
less than five years old, and 40% were launched
within the past two years.
On the demand side, according to the survey,
57% of those allocating to private equity funds said
they were now making allocations to impact
strategies, with another 18% saying they were
developing an impact-investing approach.
ESG Analysis
In addition to the proliferation of impact funds,
more private equity funds are evaluating the
ESG risks and opportunities of all the companies
they hold in their portfolios. In the PitchBook
survey, more than half of respondents said they
had integrated sustainable-investment principles
through their portfolios or had partially
done so. And more than 60% of those allocating
to private equity funds said they consider
a fund's ESG risk factor framework during their
due-diligence process.
That is a major shift from the days when
companies held in private equity and, especially,
venture capital funds were solely focused on
achieving profitability, with sustainability a " nice
to have " that might come later when a more
established company could afford to address ESG
issues. But today, more investors think early
stages are the best place for companies to start
considering their broader social and environmental
impacts, focusing on stakeholders, and addressing
the particular ESG risks and opportunities
facing their industry.
Challenges remain, of course. The availability of
ESG metrics for private companies is limited.
And the effectiveness of impact investments is
difficult to measure for impact investors who
want to see an " impact return " alongside their
financial return.
But the broader trend toward sustainable investing
in private markets-consisting of both the
incorporation of ESG risk assessments across the
board and an increasing number of impact
funds-will continue because the concerns
around big systemic issues like climate change,
inequality, and corporate responsibility aren't
going away.
The imperative of private equity investing is to
create value by nurturing companies to profitability
but also now to sustainability. K
Jon Hale, Ph.D., CFA, is a director on Morningstar's
ESG strategy team. He is a member of the editorial board
of Morningstar magazine.
1 Wiek, H. 2021. " Impact Funds by Reason and Region. " White paper. July 27. https://files.pitchbook.com/website/files/pdf/PitchBook_Analyst_Note_Impact_Funds_by_Reason_and_Region.pdf
2 Wiek, H. 2021. " Sustainable Investing Survey. " White paper. Sept. 17. https://files.pitchbook.com/website/files/pdf/PitchBook_2021_Sustainable_Investment_Survey.pdf
morningstar.com/products/magazine
17
https://www.morningstar.com/authors/1855/jon-hale https://www.morningstar.com/authors/1855/jon-hale https://files.pitchbook.com/website/files/pdf/PitchBook_Analyst_Note_Impact_Funds_by_Reason_and_Region.pdf https://files.pitchbook.com/website/files/pdf/PitchBook_2021_Sustainable_Investment.pdf http://www.morningstar.com/products/magazine
Morningstar - Q2 2022

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