Net Zero - A Supersonic ESG Agenda

17th Nov 21

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It lasted nearly as long as the Tokyo Summer Olympics, was also delayed by an entire year and had almost as many countries represented at it. It invited ridicule in some quarters for the sight of scores of private jets flying in to Scotland for a discussion about limiting the impact of climate change. It has not satisfied the activists and the protestors who wanted so much more from it. Yet it still did, in the end, reach a conclusion of some consequence. COP-26 is the real start of a serious process that will have immense implications for companies of almost every shape and size long, long before the year 2050.

It is very, very easy to be sceptical, even cynical, about these sorts of international occasions. There are so many speeches, so much posturing and pre-emptive blame-gaming, that the charge of “blah, blah, blah”, has an instinctive appeal to it. And because the deadlines for action to be implemented are so distant into the future, 2050 (for the UK), 2060 (in the case of China) and even 2070 (India), it may be tempting to almost think that they might as well be 3050, 3060 and 3070 for all that they will matter.

Tempting, but mistaken. By itself, the gathering in Glasgow will not remake the world tomorrow. It will, though, add more momentum to a huge shift that has been and will have a fundamental impact on business.

Net Zero is a sort of supersonic , extended version of the rapidly advancing ESG agenda of the last ten years.

The numbers of people who hold titles akin to Head of ESG within the private equity realm has exploded.

Back in 2011, the term ESG existed, although many also used CSR (corporate social responsibility) for much the same territory, but it was very much on the fringe of business life, especially in private equity. It was the sort of subject which might warrant a slot on the very last day of SuperReturn or a similar conference once all the heavy material had been dealt with and the biggest players in the industry had long departed for the airport. The numbers of people employed full-time to deal with ESG was small and the output required of them was marginal to reporting back to investors. This was, admittedly, a definite advance on ten years earlier still but still pretty small beer.

All of that has changed massively. In a comparatively short period of time ESG has moved from a niche to a necessity as anyone looking for investor sentiment (and investor money) will tell you. The numbers of people who hold titles akin to Head of ESG within the private equity realm has exploded. Any public speech by a Managing Partner or similar must put ESG on centre stage.

One of the biggest reasons why it is under the spotlight is that those who invested in private equity decided to focus on ESG far more intently than they had ever done in the past and as a result they forced the pace of change in a spectacular fashion. This is probably more true for Europe and Canada than the United States, but even the US is in a different place to the one that it occupied a mere few years ago. All of which is bound to influence the way that business life functions.

Where ESG was in 2011 or so, Net Zero is about now. The chances are that it will move in the same direction that ESG has done but further and faster. The level of corporate participation at COP-26 far exceeded the last really major COP meeting in Paris in 2016. Some of that activity was virtual but a lot of it involved putting people on the ground and expending serious resources on the exercise. If the fabled advice of Deep Throat during Watergate – “follow the money” – is to be trusted (and it is usually wise counsel) then we are in the early stages of something close to revolutionary in its effect.

On the opening day of COP-26 a set of eight private equity institutions announced that they were to be part of a Net Zero Asset Managers (NZAM) initiative.

A critical difference between ESG and Net Zero is that governments will be much more energetic actors in this forthcoming era. As of 2023, the UK Government in obliging sizeable FTSE companies and large financial institutions to report formally and in public as to what they are doing to reduce their carbon impact dramatically and to meet interim targets for Net Zero on a regular basis. There will be an independent method of assessing these publications. What will start with the very largest companies will almost certainly roll down to smaller ones, either because ministers will want it to do so or because some businesses will choose to get ahead of the curve and volunteer to share their own Net Zero activities to steal a march on rivals. The world of compliance is about to become even more complicated because identifying which steps would have what impact on constraining the overall temperature of the planet is a very difficult task. Before long, CEOs, COOs and CFOs will have a host of Net Zero consultants banging on their doors and offering their services for making a smooth transition to being Net Zero friendly.

Some in the private equity sector have seen the writing on the wall already and moved swiftly. On the opening day of COP-26 a set of eight private equity institutions announced that they were to be part of a Net Zero Asset Managers (NZAM) initiative. Their collective funds under management are an astonishing $57.4 trillion – a sum that is virtually the same as the combined GDPs of the United States, European Union, China, Japan and the United Kingdom. Much as one of the early signals of the rise of ESG in the last decade was the decision by a number of substantial private equity firms to sign up to the UN Principles for Responsible Investment, the willingness of the likes of ICG and Hg Capital to put their names to the NZAM is surely a signal of what is coming down the track.

We can surely be confident that history will repeat itself in that the same sorts of investors (the biggest names in the pensions industry frequently) who made ESG a core priority for fund managers to respond to will be at least as determined to make Net Zero their next campaign to deliver. That financial muscle will be hard to resist and, furthermore, limited partners are much better organised as a collective than was true a decade or so ago. The chances are that they will hunt as a pack and what they want invariably ends up happening. They will all wish to be seen as leaders in this sphere. Who would want to be viewed as indifferent about the planet? Those who want their money will need to be able to make a convincing case on Net Zero matters.

This has clear implications for investment decisions. A host of options which in purely financial terms might have logic to them may have to be looked at quite differently . On the other hand, raising funds for explicitly sustainable purposes is likely to receive a warm welcome from investors. Certain sorts of technologies are become enticing. There are always winners as well as losers from major social and economic change and being on the right side of the fence ,having the ability and agility to position a business in the light of this has never been more important both from its impact and also its ability to attract investment .

So perhaps it is worth taking the example of what happened with ESG as a template but assume that what took ten years for it, will take a lesser period of time to occur specifically in relation to Net Zero . Someone in the top tier of the company has to be willing to take responsibility for shaping a strategy for reaching the various mileposts which will need to be met well in advance of 2050 if the aspiration to achieve Net Zero by then is actually to be realised. Get greener now rather than be caught out either by inconvenient legislation or insistent investors. Above all else, treat it as an opportunity, not an obligation. The stakes are, after all, very high here.