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Changes in deeds, as well as attitudes, are shaking up the investment sector’s status quo.
With shifting societal attitudes towards climate change and responsible investing, and more urgency around the question of diversity, how prepared are investors to respond? Who is taking a lead, what works, what doesn’t, where do the risks lie, and are the opportunities created by this properly understood? With many of the world’s finance leaders, lawmakers and investors working from home, the shutdown has presented a chance to contemplate some of the great issues of our time. So it was fitting that the second day of the recent British Private Equity and Venture Capital Association (BVCA) Summit focused on the answers from some high-profile attendees.
A new, new deal?
Former governor of the Bank of England Mark Carney delivered a heartfelt and stark call for the finance community to take a lead in shaping a post-coronavirus recovery that would combine environmental and social awareness with a greater appreciation of risk.
“There are some differences in that the global financial crisis was a ‘classic’ of its type: essentially we saw a build-up in the household balance sheets in certain markets – principally the real estate market in the US – and ultimately those vulnerabilities crystallised,” he said.
The year 2020, and those that follow, will present a different set of challenges, Carney observed. “This is an asymmetric shock – Covid picks losers, unfortunately – and it’s more of a hit to supply, even while demand is suppressed by uncertainty,” Carney added. “So it makes it a more complicated adjustment.”
In Carney’s view, while some companies – like those in tech – have been fortunate enough to have their advantages reinforced by coronavirus, for others the future is less clear.
“So they will have to readjust their strategy at a time when there is a fundamental social reset, with people having the time to ponder what the future should be like, as well as a governmental determination to reach a net zero [carbon] target. So any company now should expect to be asked: ‘What’s your strategy, given all that?’ And therein lie enormous opportunities for investors.”
The impact of impact
The task of identifying and assessing those opportunities will involve understanding how each individual investment contributes to the wider environmental and social landscape. Understanding these outcomes has, until now, been relegated to its own separate category of ‘impact investing’, but as several panellists pointed out, that is being absorbed into mainstream investment work.
“We’ve already seen mainstream private equity houses setting up special impact funds, and that’s encouraging,” said Michele Giddens, co-CEO at Bridges Fund Management and a participant on a panel devoted to impact investing and its place within the mainstream.
“But when will this balance with the rest of the funds they have? And, just as important, to what extent will some of the impact, measurement and focus on outcomes come into the rest of their investments in the way ESG [environmental, social and corporate governance] has?”
“There is a fundamental social reset, with people having the time to ponder what the future should be like, as well as a governmental determination to reach a net zero [carbon] target. So any company now should expect to be asked: ‘What’s your strategy, given all that?’”
Mark Carney, former governor, the Bank of England
Giddens’ optimism was echoed by one of the industry’s most revered figures. Sir Ronald Cohen can count the founding of Apax Partners and his role as a founder member of the BVCA among his many achievements. But forcing real changes to the way the capitalist system allocates its resources with a view to the long-term health of the planet, and those who live on it, is now his greatest challenge. Fortunately, his view of whether we’ve reached a tipping point for the adoption of better practice was an optimistic one.
“If you think that a tipping point is where something accelerates and keeps going, then yes, that is where we are,” he said. “So we will see fast acceleration, and now the big challenge is to add impact investment and measurement to ESG so that it all becomes impact investment and all investment optimises risk, return and reporting.”
Of course, taking this type of approach requires fresh ideas, innovative thinking and a willingness to depart from many of the things we consider ‘business as usual’. But fostering that spirit of innovation calls for a new mindset and a new set of voices and ideas.
As one panellist pointed out, asset management in general, and private equity in particular, doesn’t have a great record in promoting and fostering diversity. But that – at last – is showing signs of change, as Pam Jackson, CEO of Level 20, explained.
“We’ve been researching this and we hope we can gather data to help us understand where the industry needs to do more,” she said.
Jackson’s determination to understand where private equity and venture capital firms must look to attract bright people from a wider range of backgrounds is already reflected in the work done by the likes of Atomico. Its partner and head of investor relations, Camilla Richards, explained that action to address imbalances within the company’s demographic is already under way.
“We’ve taken a number of steps to improve this, having set up a task force three years ago. It’s critical to get engagement from the top, and we’ve already made some real changes: for instance, we now require recruiters to have 50% underrepresented candidates on all shortlist roles, and we’ve seen a huge impact already by levelling that playing field.”
Female representation on the company’s investment team has risen from 20% to 47%, so clearly some of these changes work. But efforts to embrace more entrants from ethnically diverse backgrounds mustn’t end there.
Wol Kolade, managing partner at Livingbridge, is on the frontline of efforts to increase the representation of Black people in particular. In his view, just because change won’t happen overnight doesn’t mean it can’t happen at all.
“Our focus was on building a pipeline, so we asked private equity firms, and others in the asset management industry, to take on a paid black intern this summer, and in summers to come,” he explained. “We were delighted – and pleasantly surprised – by the response, exceeding our target of 100 roles to reach around 250.
“So it’s a first step, but if you do this kind of thing consistently, you can move that dial.”