Thought Leadership in Real Asset Investing

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The Global ESG Disclosure Standards for Investment Products are the first global voluntary standards for disclosing how an investment product considers ESG issues in its objectives, investment strategy, and stewardship activities.

According to McKinsey, “In 2021, infrastructure and natural resources set all-time highs for fundraising, AUM, and deal volume; indeed, global AUM broke the $1 trillion mark for the first time. Over the past decade, infrastructure’s mandate has evolved. Capital is increasingly flowing into subsectors that support the energy transition and digitization, such as alternative energy, clean-tech solutions focused on improving environmental sustainability, and “infratech.” Investors are also looking beyond physical assets at operating companies and technologies to generate value. The sustainability transition presents opportunities and risks—both substantial. GPs and LPs continued to formalize environmental, social, and governance (ESG) commitments in 2021: over half of total fundraising—the highest percentage ever—flowed to firms with formal policies. Investors have become particularly focused on environmental sustainability, a potential win–win for private markets investors who support positive impact while driving returns. Firms can create value by transforming unsustainable business models into green ones and investing in companies scaling decarbonization technologies. Considering climate risk in underwriting is now an imperative; firms that do not run the risk of mispricing their investments.” 

(Reprint from CIO Magazine) 

CalPERS’ Project to Measure ESG in Private Equity Has 100 Organizations, $8 Trillion Participating.  Environmental, social, and governance investing is notoriously difficult to measure in a private equity context.

"Three months ago, the California Public Employees’ Retirement System (CalPERS) launched the ESG Data Convergence Project, an attempt to measure environmental, social, and governance (ESG) milestones within private equity. The pension has partnered with The Carlyle Group, the international private equity asset management group, on the project.

At yesterday’s CalPERS board meeting, Julia Jaskolska, associate investment manager of private equity at CalPERS, told the board that the project has now reached more than 100 organizations and $8 trillion assets under management (AUM). More updates regarding the project are expected to come in the upcoming months.

ESG has traditionally been difficult to measure in private equity since private equity companies are not beholden to the same levels of transparency as public companies.

CalPERS and The Carlyle Group are hoping to collect data and measure company performance on six different factors: greenhouse gas emissions, renewable energy, diversity of board members, work-related injuries, net new hires, and employee engagement.

“We’re doing this work in order to support CalPERS’ fiduciary duty to generate sustainable risk-adjusted returns to pay benefits,” said Managing Investment Director Anne Simpson at the board meeting, in a reference to the pension fund’s efforts at increasing sustainability.

With a growing world population and rising incomes, global food systems will need to deliver 56% more food by 2050. Investments in agriculture infrastructure and associated technological advances can help strengthen global food supply chains by increasing operational efficiencies, lowering costs of production, and decreasing food losses. These advances can also contribute to climate change adaptation and mitigation by reducing the use of water, fertilizer and pesticides, displacing fossil fuel use, and minimizing waste throughout the agricultural supply chain. It’s estimated that global growth will boost food demand by 20,500 trillion calories by 2050—a potential opportunity for investors to make a positive difference.

“This is the first order of business when capital providers start their screening process for companies with the concern around climate change and with the U.S. rejoining the Paris Agreement,” he said. Underhill said oil and gas companies must demonstrate that they are efficient in managing their use of energy. “The ability to use less energy and deploy it in a more efficient manner and reduce their carbon footprint is important,” he said. “There are 50 billion tons of greenhouse emissions contributing annually to climate change right now.” Energy producers and providers must also demonstrate that they are addressing social issues, including cybersecurity concerns such as the hack and ransomware of the Colonial Pipeline and the product quality and safety of wells and their employees, Underhill said. 

Institutional Investor Magazine Interviews Capital Innovations Chief Investment Officer Michael D. Underhill regarding "What the Post-Pandemic Future Might Hold for Institutional Investors"

 Michael Underhill, the CIO of Capital Innovations, drew on a particularly wide range of contacts last year. “Reaching out to the firms in our existing network — such as entrepreneurs, private equity firms, venture capital firms, co-investors, legal and accounting professionals — helped reduce the legwork for our team,” he notes. 

GRI USA Club senior real estate investors, asset owners, private equity firms, developers and lenders gathered online for a private conversation to discuss the risks, trends and changes that 2021 will have on the USA real estate market. Sentiment driven by the new Biden Administration reveals that 53% of those with invested interest across USA real estate opportunities believe that the USA economy will recover from the COVID recession until 2022.

A worry that stood out was that since economic growth will be limited in the next couple of years, debt continues to increase and companies struggle to survive and it may have repercussions in the CRE investments in the medium-long term.

This GRI discussion was led by Michael D. Underhill (Capital Innovations, LLC), Alan Kava (Goldman Sachs), Amy Price (BentallGreenOak), Scott Darling (American Realty Advisors) and other members present. 

ESG implementation in real estate strategies, throughout 2019, emerged as a new trend with LPs switching their focus towards impact & sustainable investments, which resulted in 2020 starting off with the largest investment volume for real estate impact investment strategies to date. But with the pandemic outbreak, tenants are increasingly concerned with the impact of buildings on their wellbeing, while investors are trying to minimize risk exposure to climate change related issues, such as fires, droughts and floods, through impact and socially responsible investments. 

GRI Real Estate private equity event with Michael Underhill examining how tenants flock to high-quality properties during pandemic and beyond.  

Investors across the board are interested in co-investment opportunities in distressed assets and loans. National Real Estate Investor interview with Michael Underhill

Michael Underhill's Benchmarking Infrastructure for ESG Performance session.

Investors increasingly look for private equity managers to provide opportunities for co-investing outside the fund structure, thereby saving fees and carried interest payments. In this paper a large sample of buyout and venture capital co-investments are examined to test how such deals compare with the remaining fund investments.