Increasing awareness of the impact that economic activity has on the world around us has led more and more businesses to embrace aspects of responsible investing. The debate continues as to the best way to tackle climate change, but in the meantime, a significant proportion of firms have included provisions for environmental responsibility within their investment criteria. Many have become signatories to the United Nations Principles of Responsible Investment, which lays out guidelines for corporate social responsibility.
The subsequent demand for environmentally-aware funds has filtered into the private equity universe: Preqin’s Funds in Market online service shows there are currently 45 funds in the process of raising capital that have stated a commitment to environmental responsibility. Cumulatively, these firms are targeting over $9.3bn, with growth funds making up just over a quarter of the total number of vehicles. The fact that growth funds make up such a significant proportion of the data set is interesting, as from 2009 to 2012 the number of environmentally responsible growth funds was outweighed by venture capital funds with the same criteria. 2013 saw a tie in the ratio of venture capital to growth vehicles, and so far in 2014 environmentally responsible growth vehicles have accounted for twice as many fund closes as the same category of venture capital vehicles. With more environmentally responsible growth vehicles currently raising capital, it is likely that this trend will continue over the short term.
Infrastructure funds have been known to raise capital for environmentally responsible projects, and therefore it makes sense that this fund type contributes a significant amount (25%) of total capital for environmentally responsible investments. Since 2009, only 10 infrastructure funds with a commitment to environmental responsibility have held a final close. However, there are currently eight infrastructure vehicles on the road with the same commitment to environmental responsibility. The majority of these funds focus predominantly on the renewable energy and clean technology sectors which have seen a boom in recent years.
In terms of geographic focus, over 40% of environmentally responsible vehicles that have held a final close since 2009 have focused on investing in opportunities in Europe. A further 31% focus on opportunities in the US, with Asia, the Middle East, Africa, Australasia and the Americas making up the remainder. It can be seen that among funds aiming for environmental responsibility, there is an overwhelming tendency to focus on their country or region of origin. Out of 82 vehicles, 85% stated their main geographic preference as the country or region in which their fund manager is based.
While funds targeting environmentally responsible opportunities still make up a small percentage of the private equity universe, the implications of climate change and a growing trend in corporate social responsibility mean that this category of funds may see a boom in the future.