The rise of ESG and the role of carbon offsetting

Published 26 October 2020

We asked Graeme Ardus, Head of ESG (Environmental, Social and Governance) at Triton about trends in the investment sector, the rise of ESG and how Triton’s carbon offsetting programme with ClimateCare fits into its climate strategy.

How is the investment sector changing?

It is now widely understood that non-financial factors can inform us about business performance. As a result, there is increasing recognition of the importance of ESG topics, across the investment sector.

There is also a move away from thinking solely about how these factors impact a business today, to using them as an indicator of future performance.

For example, if we think about how businesses traditionally thought about climate change, it was in terms of how the company impacts climate change, in the sense of how much energy it uses or what it is emitting. 

Now businesses are increasingly thinking about how climate change impacts them. This can be through either physical climate impacts like droughts and flooding causing operational and supply chain disruption. These can also be transition climate impacts such as carbon regulation.

Importantly, climate change can also impact markets and demand, for example growing public awareness on climate change is leading to a surge for greener products and services. If we want to think about how climate change is going to impact business in the future, all these risks and opportunities must be considered.

What's behind this change?

Historically, action, or inaction, on climate change has been driven by individuals, based on the extent of their belief in the risks posed by climate change. 

Now, whatever your personal view, markets are reacting and adapting to climate change and so everyone has to respond – it is a mainstream operational and commercial risk.

As a result, investors, including those investing in PE firms like Triton, understand they have a role to play – and are asking us what we are doing to manage climate risk. They want to know how their capital is invested. Are the companies they are invested in aligned to and addressing these factors? Of course, they don’t want to be invested in a sector that will be impacted negatively by climate change or companies which don’t have plans to manage these risks.

34% of investors think that companies do not adequately disclose the environmental risks that could affect their business models.

Linked to this is increasing visibility. More and more information is being made available digitally. This is driven both by an increase in demand and regulation – forcing companies into more regular, in depth and transparent reporting.

All these factors combine to make a robust climate strategy core for every company – not a nice to have.

How is this change impacting investment strategy?

Recently we have seen a real shift from investors making risk aware investments, to opportunity aware investments.

Investors are looking for sectors that stand to benefit from changes related to climate change – be they in policy, market demand, or opportunities for new green products and services.

In 2019, 85% of investors express an interest in sustainability-focused strategies, up from 71% in 2015.

Companies looking for investment can take advantage of this trend, by demonstrating a robust climate strategy and a circular economy approach.

This shift is relatively new, but it is quickly becoming mainstream. It’s driven by growing evidence that climate-aware investment strategies do yield results. For example, only a few years ago, renewables were propped up with subsidies, but they are now price competitive commercial opportunities.

How has ESG changed?

The evolution of ESG has mirrored the change in people’s perspectives about climate change. Over the last 7 years, since I joined Triton, ESG policies have moved from a focus on ‘do no harm’ to a desire to ‘be on the front foot’ and have a positive impact.

Running alongside this is an increase in the need for transparent and robust reporting. This is partly driven by regulation. For example, the EU non-financial reporting directive, the Green Deal and EU Taxonomy all call for increased ESG reporting.

Between 2016 and 2019, monthly investment in companies with good sustainability ratings was 15% higher than in companies with poor ratings.

But it’s not just policy driven. Stakeholders across the board are demanding more information on companies’ ESG performance. This pushes companies to have more robust ESG strategies – and communicate them to their employees, customers, and investors.

And another driver is the opportunity for companies to secure sustainable finance by differentiating themselves on ESG performance. Investors increasingly use ESG performance as a proxy for good management and companies that can differentiate themselves on this basis may be able to secure better interest rates on loans dependent on ESG performance.

This is only going to increase the speed at which ESG becomes more robust, more transparent and more integral to business.

Do you agree that COVID-19 is speeding the drive for Investment houses to improve ESG?

Yes, but in my view, Covid-19 is driving the ‘S’ (social) of ESG, rather than the ‘E’ (environmental).

The initial concern was that government funding and attention would be focused on recovery, and that action on climate change would become less of a priority. However, all the evidence is that this is not happening. Instead, governments around the world are using this as an opportunity to ‘build back better’ and integrate green policy into economic recovery plans.

55% of investors believe that the COVID-19 crisis will be a positive catalyst for ESG momentum.

How is Triton responding to this changing environment and where does carbon offsetting fit?

We want to be successful. And we want our portfolio companies to be successful. To do this, we need to be engaged. We need a robust ESG strategy that benefits our portfolio companies and our own brand.

On the environment side, we have a long-term strategy to decarbonise, but this takes time. We want to take responsibility for our emissions now. Alongside implementing strategies to reduce our footprint and move to renewable energy, carbon offsetting is an essential tool.

It allows us to do something real and meaningful today. We take full responsibility for our carbon footprint, and that of our Portfolio Companies. Over time, as we continue to reduce our footprint, the requirement to offset will decrease.

Why did you choose ClimateCare as your carbon offsetting partner?

We took our selection of a partner very seriously. We already had a strong view about what we wanted to achieve, but we also saw value in working with an expert partner, who could give us independent advice.

By speaking to others in the sector, we identified ClimateCare as an expert in this field. In particular, its work with other clients, Governments and Aid agencies gave us confidence – demonstrating its credibility, robust approach and track record.

ClimateCare’s focus on projects that improve lives as well as cutting carbon was another decision maker. The way the team assess projects against the UN Global Goals allowed us to match our carbon offsetting programme to our broader ESG strategy. The projects are also certified against internationally recognised standards.

Another advantage of working with an expert partner like ClimateCare is that they understand what other businesses and sectors are doing – what good practice looks like – and this was invaluable to us.

What advice can you give to an investment house starting to devise their ESG strategy?

The first thing is to do some stakeholder research. Understand what is material to you – your employees, your investors, your customers. This will help you prioritise.

When we started this process, we had a view about what was needed within the ESG team at Triton. But it was only by engaging with our own investors and our sector teams – who see the impacts first-hand – that we were able to develop the right strategy.

There is currently a big drive from prominent publicly listed consumer-facing brands to commit to becoming Net Zero. Over the next five years I think there will be a much wider spectrum of businesses signed up to these commitments. I also think that the targets will become much more specific –as we reach more agreement on what Net Zero means – for example including dates by which this will be achieved.

Carbon offsetting is a great way to get on the front foot on this journey. And it is the basis on which you can build a robust climate strategy going forward.

It’s also a great way to engage people and drive change. It focusses minds on how to reduce emissions and drives innovation in strategy leading to the creation of low carbon products and services. All this helps turns our climate risk into climate opportunity.

And, stakeholders like it. In addition to having a long-term strategy, it’s compelling to say that you are doing something today.

100+ million tonnes of emissions have been reduced by Climate Impact Partners

Now, whatever your personal view, markets are reacting and adapting to climate change and so everyone has to respond – it is a mainstream operational and commercial risk.
Graeme Ardus, Head of ESG at Triton