As the dust settles on the pandemic crisis, the smart money will increasingly focus on green investments.
That’s the prediction from PitchBook, a Morningstar company that serves the private-equity (PE) industry. In a recent report, COVID-19’s Influence on the European PE Market, two PitchBook analysts said private investors have now entered “defensive mode,” with a specific emphasis on risk identification and resilience.
This framework, the analysts said, should particularly benefit investments related to the UN’s environmental, social and governance (ESG) goals. Once professional investors begin to scrutinize market, financial and geopolitical risks, they can hardly ignore the threats of climate crisis and inequality.
“Greater premiums will be placed on business stability and resilience as companies brace themselves for inevitable black swans” (the next existential disasters), says PitchBook. “We think investors will double down on ESG following this crisis, as society becomes more sensitive to companies ‘doing the wrong thing.’”
The study noted, of course, that the COVID crisis has created many challenges for private equity, including the solvency of its hardest-hit portfolio companies. Raising further capital will also probably be more difficult.
But in the meantime, the authors say, “the current market dislocation may present favourable buying opportunities.” Companies focusing on social change have often been considered outliers. Now, according to PitchBook, companies pursuing ESG-related objectives may be more resilient to future shocks.
This new perspective could mean a shot in the arm for companies involved in areas such as energy efficiency, green infrastructure, waste management, water solutions, biotech, health and wellness, and selling to underserved markets. According to PitchBook, European PE investors have a record US$259 billion to invest – even in these tough times. U.S. private equity invests about US$300 billion a year.
“ESG has gained a foothold that will not be set aside this time,” Hilary Wiek, PitchBook’s senior analyst, told Environmental-Finance.com.
“In fact, it can be argued that ESG and impact [investing] have a moment to shine right now.”