2 In focus: A breakthrough year for sustainability
In 2019, climate change dominated the discourse in the public, among politicians, and in the business world. We have talked to some of the players on the Nordic private equity scene about how business is affected.
“A colleague in the Norwegian finance industry told me the other day that he experienced more action on sustainable finance in 2019, than in the 20 years before that,” says Hanne Thornam, head of sustainability services at EY Norway. “Last year was a tipping point, because the market, the finance sector, and governments pulled in the same direction. I have worked in this field for 16 years and now we finally see these forces coming together to create a lasting momentum.”
A Danish and Dutch study from 2020 finds that nearly half of Nordic institutional investors, 43 percent, now invest using an ESG approach (see facts). The study also showed that nine out of 10 investors were interested in impact investing, and 22 percent had plans to invest in impact strategies. However, only 5 percent of portfolios were allocated to such investment strategies now, according to the study.
It is still notable that, among the three ESG factors, the environmental factor has grown most in importance for the surveyed investors in the last years (see graph). The shift last year was in Thornam’s eyes embodied by one example on the Nordic private equity scene.
“When HitecVision launched its new strategy, a fund manager that is heavily invested in the oil and gas services industry, it was a solid proof of a new situation in the financial markets,” she says.
Source: Kirstein/NN Investment Partners.
Looking to renewables to grow
In February 2020, HitecVision announced the establishment of Moreld, a new industrial group based on 20 of the companies in its portfolio which up until now have concentrated on the oil and gas industry. They will be provided with resources to accelerate development into other segments of the energy sector and other industries, including the renewables market.
“If you look at the pricing of ‘green’ companies in 2019, it is clear that investors’ attention and capital have moved towards the green transition,” Arne Trondsen, senior partner at HitecVision says. “We get this signal from our investors as well, that we need to have two thoughts in mind at the same time. On one side, we need to produce oil and gas in the most effective and climate-friendly way. On the other, we need to find and build new energy sources. We will invest in both these trends in the decades to come,” he says.
Climate considerations are a prerequisite for both the selection of new investments and in the work with the current portfolio for HitecVision, according to Trondsen. The target is to reduce the overall carbon intensity of the portfolio through a combination of operational improvements, electrification, wind power, carbon capture and storage, and advancing other technological solutions.
“What we are good at, is building companies. We can create a sense of urgency, direct our priorities, and deliver projects on schedule,” Trondsen explains. “Looking at offshore wind power, as an example, someone will need to build the value chain and be able to manage the risks.”
Solution investments
Another player that has noticed that companies embraced the strategic value of ESG in 2019 is Norvestor, a Norway-based fund manager with much of its investments in energy, marine, and maritime.
“For several years, we have driven an active ESG agenda across our portfolio companies. 2019 is the year that ESG went from being compliance-driven to becoming a real investment opportunity”, says Per-Ola Baalerud, partner at Norvestor. “It is like a snowball that we have pushed uphill for some time now, and then as we passed the hilltop in 2019, it has gained an incredible momentum since.”
“This leads to exciting opportunities. Permascand, a company in our portfolio, has used its core technology platform within electrochemical solutions to develop solutions for ballast water treatment responding to the International Maritime Organization’s directive to reduce emissions from the shipping sector. They are also very profitable, with 50 percent annual growth,” adds Tor Erling Gunnerød, partner at Norvestor.
What this shows, is that product and service companies grow their top line as they partner with clients to develop sustainable business practices, Baalerud and Gunnerød point out. The companies develop technologies that enable the energy and marine industries to reduce their environmental footprint, often in a transformative way.
“We also have companies that have gradually evolved their business from oil and gas. EnFlow, with a 30-year history delivering products and services to the offshore industry, now generates most of its revenues from the aquaculture and fisheries industry. They are also a leader in fish welfare solutions. The shift has not only been profitable but also contributed to a significant reduction in fish mortality by applying technology and competence developed in the energy sector,” says Baalerud.
Developing climate assessment tools
Thornam at EY believes that private equity funds can play an important role by guiding portfolio companies in the green transition.
“Many Nordic private equity funds now take sustainability into account when targeting and developing companies. More and more private equity investors ensure that their investments are prepared for related risks and opportunities by setting individual ESG and climate goals and plans for each company. This is how active ownership opens up for real movement on this subject,” she says.
One of these fund managers is FSN Capital, which developed and rolled out a climate assessment tool for their portfolio companies in 2019. Their goal is to identify climate risks and opportunities along each company’s value chain.
“Company specific climate assessments were conducted by external experts and discussed with each chairperson and CEO to define the top three climate risks and opportunities. Each portfolio company also submitted climate risk reports, inspired by the TCFD, to help structure and guide the work going forward,” says Rebecca Svensøy, general counsel at FSN Capital Partners.
Moreover, both FSN Capital and their portfolio companies in FSN Funds IV and V has started to track greenhouse gas emissions. FSN Capital Partners also considers climate change at the sourcing stage when they identify and select companies to invest in, Svensøy says.
Source: Kirstein/NN Investment Partners.