The evolution of sustainable private markets

Teresa O’Flynn, Global Head of Sustainable Investing, BlackRock Alternatives Investors (BAI), Padmesh Shukla, Head of Pensions Investment, Transport for London (TfL) Pension Fund, Bert Pijls, Chairman, Calisen

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

Teresa O’Flynn, Global Head of Sustainable Investing for BlackRock Alternatives Investors (BAI), is joined by Padmesh Shukla, Head of Pensions Investment, Transport for London (TfL) Pension Fund; and Bert Pijls, Chairman at Calisen, the UK’s largest provider of smart meters and a BAI portfolio company, to address how sustainability is transforming their respective organisations and how to have capital on the right side of this trend.

Private capital must close the 60% funding gap for net-zero emissions

The global bill for hitting net-zero carbon emissions by 2050 could top $50 trillion. The world faces a 60% funding gap. The majority of that capital will have to come from non-government sources. For private capital, the transition is a historic investment opportunity.1

Climate change is a risk and an opportunity for private market investors

Trustee and investment team thinking has changed significantly since then. Climate change is a risk to existing portfolio holdings and an opportunity to be explored.

Sustainability plays an increasingly important role in every investment decision, based on their real-life impact and contributions to the United Nations’ Sustainable Development Goals (SDGs).

Firstly, there is risk. Polluting sectors face an increasing squeeze on funding and the threat of regulation that could make their business models untenable. To paraphrase Bill Gates, Shukla believes markets overestimate the short-term change and underestimate the long-term impact.

Data and transparency are vital if shared ESG aims are to be met

Stewardship is also important. In fact, thinks Shukla, it can be more effective in private investments than in public markets where shareholders are fractional players – one voice in a sea of thousands. Even as a limited partner (LP) in a private market fund, the relationship with senior management is far closer and frequent, allowing for a more constructive dialogue. That is partly why one-fifth of the fund’s alternative allocation is now in private markets.

The comparability of sustainability data is problematic, no matter the investment structure used. But the same could have been said of accounting methods until the International Financial Reporting Standards (IFRS) arrived. Global efforts to standardise ESG data are underway.

Until then, active management can ensure data is collated to the investor’s exacting needs. The long-term nature of private investments is a benefit. Private investors take a longer view than dividend-hungry public markets. That time horizon is a lever of control, a tool to nudge management behaviour and commitment to transparent, reliable environmental, social and governance (ESG) data.

Private markets are well placed to invest in the multi-year transition

As a company on the receiving end of private capital, including from the BlackRock Global Energy and Infrastructure Fund, Calisen intends to make full use of the appetite for sustainable opportunities and BlackRock’s extensive internal and external networks. The company operates six million cloud-connected smart residential electric and gas meters in the UK. A further seven million meters are contracted for installation.

As the UK’s largest smart meter firm, the business lies at the heart of the energy transition, a process that could take decades to complete. Customers can expect savings of 3% by better timing their electricity use to cheaper night-time tariffs and 2% on gas.2  That may not seem a lot, but when tied to the real-time data that is sent directly to utilities and power generators, better use can be made of all energy sources, says chairman Bert Pijls. Energy firms enjoy obvious cost savings too, as meter-readers no longer have to visit homes up to four times per year.

Close collaboration is needed between GPs, LPs and target companies

Calisen was a FTSE 250 listed company until it was taken private. Pijls says the new capital structure suits the company’s long-term aims of decarbonisation, decentralisation and digitisation.

Growth will focus on three segments: UK growth in residential, plus potential in commercial and industrial; international expansion as regulation allows, with Australia, New Zealand and the US looking interesting; and adjacent technologies, such electric vehicles, batteries, solar, heat pumps and transfers between house, home, workplace, car and the grid.

Pijls does not expect his private investors to be passive. BlackRock is a substantial investor in hotels, supermarkets and other businesses that could benefit from the smart energy effect. If you do not do a good job on sustainability, your capital costs go up, says Pijls.

Reporting and sharing information with stakeholders is just as important as a private company, he adds, not least to aid quick and effective decision making. TCFD and the UK’s Streamlined Energy and Carbon Reporting (SECR) frameworks will be strictly adhered to.

1 Source: The Financial Times, 2021
2 Source: Calisen, 2021