How PE and VC attitudes towards green finance are changing

By Elizabeth Delaney, partner at UK law firm TLT

Elizabeth Delaney

While the financial services market as a whole is gearing up for more green activity in 2022, our latest research reveals an interesting divergence in attitudes in the private equity (PE) and venture capital (VC) markets.

According to our recent report, Safety in numbers: levelling the playing field for green finance, 92% of all financial services firms will have launched a green finance offering by the end of 2022, and for PE and VC firms that figure is only slightly lower at a still significant 88%.

However, while PE and VC firms are the most likely group to describe green finance as “critical” to their business strategy (18% compared to 5% for lenders and 7% for asset managers), they are also the most likely to say that having a green finance offering is “not very important” or “not at all important” to their overall business plan (12% compared to 9% for lenders and 10% for asset managers).

This reflects our own understanding of the market; while there will be some firms that choose not to invest so significantly – or ever – in sustainable businesses, this is undoubtedly a growing area and presents an interesting opportunity for investors and fast-growing businesses alike.

Pressure to evolve

VC firms have already made significant headway, thanks to their more nimble business model.

When we analysed where the biggest pressure and demand for green finance is coming from, the top results for PE and VC firms were employees and future recruits (41% strong demand; 88% strong and moderate demand), closely followed by customers (41% strong; 82% strong and moderate) and other financial institutions (41% strong; 82% strong and moderate).

When it comes to the biggest perceived challenges to implementing a green finance offering, it’s the same for PE and VC and firms as it is for the rest of the financial services market: cost.

While this is currently seen as a “cost of going green”, new pressure and regulations could force the industry to support a net zero economy and therefore see this instead as a “cost of doing business”.

Furthermore, studies increasingly show that sustainable businesses can hold more value, and there is significant innovation happening – for example in technology to support a sustainable future, as well as clean energy solutions and environmental consultancy and consumer products.

The role of technology

 As ESG performance starts to have an even bigger impact on company value, there will be a significant opportunity for PE and VC firms to use technology to assess and monitor more quickly how their portfolio is performing against pre-defined ESG criteria.

According to our research, 65% of PE and VC firms are already exploring new technologies to support their green finance strategies, while almost a fifth (18%) say they have no concrete plans to do so.

Again, there is this divergence in the industry, where those that have moved quickly on the green finance opportunity are already one step ahead, and others may take longer to get there.

This is clearly an area that will continue to expand in 2022, as key stakeholders demand a long-term strategy that’s aligned with the ESG agenda.

Firms will need to have a solid grasp of ESG criteria and understand what a ‘good’ baseline of performance looks like, and technology will play a key role in determining where this benchmark should be.