The growth of climate investing in private markets

PE sustainable, ESG and impact fund AUM has risen from $90bn to more than $270bn

Carlotta Saporito


Carlotta Saporito, head of impact investing, J.P. Morgan Private Bank

Climate investing has gained significant momentum in recent years, as governments, institutions and companies gear up their decarbonisation efforts. Within the energy investment space alone, capital invested in wind and solar assets, electric vehicles, nuclear power, hydrogen, energy efficiency and supporting grid work topped $1.1trn in 2022. Just as importantly, revenue from the energy transition, just for public-listed companies, was $2.6trn.

Within this space, it is becoming increasingly clear that innovation – new technology applied to old business models and old technology applied to new business models – will play a key role in facilitating the transition towards a more sustainable economy.

This recognition has been leading to increasing investment flows into private companies. To put this growth in context, when we look at the past few years [2019-2022], private market equity investors launched 330 new climate-focused ESG, sustainability and impact funds with cumulative funds under management growing from $90bn to more than $270bn in this time.

Key to generating impact is having the ability to influence investees, something that is more challenging for public market investors in the absence of significant or controlling stakes in a company. In the private world, investors can use their ownership and role on boards and other governance bodies to influence a company’s strategy.

Another reason private markets are compelling is access to innovative and new technologies that are spearheaded by forward-thinking entrepreneurs, with many fast-growing disruptors helping drive innovation and potentially higher investment returns in the coming years being early-stage private companies. In fact, we are seeing more corporations – in a bid to remain at the forefront of their industry – outsourcing innovation by investing in, and increasingly acquiring, private companies who have created solutions to decrease the carbon -intensity ways of their businesses.

We are also seeing a growing trend of companies staying private for longer. On a global scale private markets are now 10 times larger than public markets. In 1999, the average age of a new public company was four and a half years, and in 2020, this has nearly tripled to 12 years, as companies opt to remain private during the steepest phases of their growth. When we look at climate tech specifically, start-ups have been driving innovation in the sector with venture capital playing an increasingly bigger role here. Climate tech now accounts for 25% of all venture capital dollar invested in 2022.

Disruptive companies

However, historically we have seen underinvestment in climate solutions within carbon-intensive industries, which has led to interesting pockets of opportunity across several impact themes from agricultural technology and alternative fuels to industrials and sustainable infrastructure.

For instance, the foundation industries – cement, metal, glass, etc. – are the UK’s biggest industrial polluters, producing 10% of the CO2 emitted by all UK homes and businesses. Cement specifically accounts for 8% of the global greenhouse gas emissions. As a result, there are a number of companies emerging that are creating viable alternatives to cement that are low or zero carbon, and in some cases, even negative carbon.

One such company has successfully found an alternative process to baking limestone to create cement, which ordinarily releases large amounts of CO2 into the atmosphere. They’ve achieved a net-zero replacement for OPC, the most commonly used cement, which can fit seamlessly into existing supply chains where OPC is already in use.

There are a number of other disruptive companies emerging with more sustainable solutions to existing carbon-intensive processes that make investing in climate markets an exciting area for private investors.

Looking ahead

Impact investing, and climate solutions in particular, remains one of the bright spots in a tumultuous financial market, with the increased urgency of global headlines, policy tailwinds, shifting consumer preferences and corporate responses to the climate crisis continuing to fuel a search for solutions.

However, as the number of potential investment opportunities grows, we will continue to see increasing variation in quality and dispersion of returns. This is where discipline in the investment selection becomes even more important, leveraging expertise and tools to open market opportunities for investors, to ensure a sustainable future.

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