Climate crisis remains investors’ top ESG issue in 2022

Pollution, waste management, and natural disasters prove to be the most enduring ESG concerns as 2022 unfolds 

As environmental, social, and governance (ESG) considerations continue to engage alternative investment managers and investors alike, climate change again sits atop investors’ concerns. Following another year of rising global temperatures and increasingly frequent and severe natural disasters, the threat climate change poses to the quality of human life has grown more apparent. However, the specter of stranded or obsolete assets weighs heavy on investors’ minds as regulatory initiatives geared towards sustainability support ESG-minded companies and clean technologies.

Among the issues Preqin posed to investors in our November 2021 survey, 59% cited environmental-related issues among their top concerns (Fig. 1) – ahead of diversity & inclusion (27%), and COVID-19 pandemic-related issues (18%). More specifically, issues surrounding plastics and other wastes and pollutants were top of mind. 

A look back to the same survey from a year earlier hints at a more long-term trend. Climate change threats still ranked highest among respondents in 2020 at 58%. The biggest difference between the two years was the drop in concern over political risks and the economic impact of COVID-19. This was to be expected given the 2021 survey was conducted when most regions globally were still experiencing lockdowns, and vaccine programs were less established. 

Where does private capital come in?
Investor demand and regulation, anticipated or enforced, has driven ESG investing from the beginning. UNPRI signatory data shows a significant gap between asset owner adoption and that of the investment community (Fig. 2). That gap closed rapidly after 2019, however, as ESG-conscious regulation was adopted and investor demand increased. As such, Preqin data shows that private capital, notably venture capital, funding in sustainability-focused North American companies has accelerated in recent years.

Venture capitalists have put more than $14bn into companies operating in the environmental services industry since 2010 (Fig. 3). Nearly 1,000 of these investments have financed companies mostly operating in recycling, pollution control, and waste management, as well as the broader green IT industry, which addresses sustainability through computing technology. 

The trajectory of that growth hasn’t been constant. Of the $14bn in deal value since the end of 2010, nearly $10bn was raised after 2016. Perhaps, as that was the year the Paris Agreement came into force, the likelihood of regulatory actions devaluing less sustainable assets loomed larger. Indeed, this has been a key motivator for investing in companies with forward-looking environmental issues in mind.

The environmental services industry has played host to a diverse set of sub-industries and specialties. One of these companies, View Inc., leads North American environmental services companies with more than $2bn in funding since its 2007 founding. The company, now trading publicly, developed nanotechnology to create a smart glass for building construction that adjusts to sunlight, thus lowering energy consumption. This attracted investors including SB Investment Advisors, Sigma Partners, and BlackRock. Since its October 2020 debut on the NASDAQ, shares of View have struggled to keep pace with the broader markets, and are currently down by 14%.

Redwood Materials, another environmental services company, is also gaining attention. The Nevada-based company, founded in 2017, was the target of the largest venture capital deal last year focused on sustainability. In July 2021, the company secured $700mn in series C funding from a consortium of investors including T. Rowe Price, Goldman Sachs, and the CPP Investment Board, among others. Redwood’s post-money valuation was estimated at $3.7bn.  

Redwood, led by former Tesla co-founder and chief technology officer JB Straubel, sustainably recycle batteries and obsolete or end-of-life electronics, with a focus on avoiding mining new materials. Among the key elements it derives from this process are lithium, nickel, and copper, all key to electric vehicles. 

Toward a sustainable future
Pressure from regulators, investors, and consumers will drive demand for sustainable products and services. The electric vehicle (EV) is the most prominent example of these three market forces converging. The Pew Research Center reported in June that about 1.8 million EVs were registered in the US, up threefold since 2016. This uptake was indeed fueled by tax credits, but also consumers willing to adapt to these new products, notably Tesla’s luxury vehicles, which in turn brought in more investment. 

Even though this is one specific case, it is an ideal example of how more environmentally friendly business can come to market and thrive in the global economy. Investors and fund managers both recognize environmental threats as existential, but practice must meet concept for anyone to do anything about it. 

Preqin's market leading data forms the foundation of our ESG Solutions. Designed for private markets by private markets experts, our full suite of tools give you the data and insights you need to integrate ESG into every stage of the investment decision-making process.