“Understood properly, ESG frameworks help to mitigate risk and drive value creation” - 5 Questions with Ashim Paun, Head of Sustainable Investing, Triton Partners
With SuperReturn CFO/COO 2023 taking place next week, one of the most important and ever-changing topics in recent years has been sustainable investing. We spoke to Ashim Paun, Head of Sustainable Investing at Triton Partners to discuss the biggest challenges to sustainable investing, growth and opportunities in the sector, greenwashing, ESG, and how to approach this.
Where do you expect the biggest challenges to be when investing sustainably? How can managers approach these challenges?
The definition of ‘sustainable’ remains one challenge. The risk of greenwashing has led lawmakers, particularly in Europe, to introduce regulation which brings regular reporting requirements around specified indicators and a set of standards. This is an evolving area.
A second risk can be multiples – the growth in ‘green money’ means markets can value sustainable solution providers at levels which many funds struggle to meet within their mandates, regardless of overall appetite to invest in products and services backed by environmental and social trends.
Furthermore, green investments can present higher levels of technology risk or project risk. This can, again, conflict with the mandates of some fund managers, thus limiting the flow of capital to support important, nascent industries.
How has sustainable investing improved? And what progress do you expect to see in the future?
Sustainability has gone from a fringe area of finance to being deeply embedded across most asset classes and virtually all regional markets. This makes sense – understood properly, ESG frameworks help to mitigate risk and drive value creation.
Nevertheless, we’ve seen pushbacks emerging more recently. I would say these come from opposing ends of the spectrum of debate - both from those who see inherent risks to current structures of political economy, and from those who believe sustainable investing, as it stands, will not lead us to a better world but merely greases the cogs of late-stage financial capitalism.
I think the answer is more nuanced, that modern industrial capitalism has some very rough edges - what economists would call social and environmental externalities - and that a focus on sustainable investing can provide one source of check and balance, alongside regulation, consumer choice and pressure from civic society. But you’d need to give me a lot more than this short interview to thrash that one out…
Despite its detractors, sustainable investment will likely grow overall, enabled by smarter regulation, better market integration and, ultimately, proof of performance.
Are there any specific strategies and regions you're investing in or where you're seeing growth?
It must be a fun time to be a venture capitalist with a focus on sustainability. The range of solutions that solve problems around climate and industrial pollution, in particular, is vast, and many of the ideas I see promise exciting ways to fix real problems.
As a private equity buy-out investor, focussed on focussed on fundamentally sound mid-market companies that have some issues to address, we come in a little later. We invest in products and services where we see opportunities to modernise and develop companies, often pivoting them towards adjacent, sustainable technologies and new end markets. In our stable is a fertiliser company Fertiberia which, since our investment, has evolved to become a pioneer in the commercially viable production of green ammonia. Another Triton portfolio company, DeepOcean an offshore energy services company, is now increasing revenue from offshore wind.
How are firms and investors affected by ESG integration, and what value does it add to investment opportunities? Do you think they are aware of these opportunities?
Market participants can now see proof of performance. Banks, consultants, and business schools have analysed the data, finding evidence around revenue growth, EBITDA margins, return on assets and equity, as well as lower volatility, when analysing the performance of portfolios with higher ESG ratings or higher exposure to sustainable solutions.
The buyside will increasingly find value across the cycle – demonstrating rigour around ESG is important to fund investors, while it can support smarter investments, support in de-risking assets during ownership, and lead to higher multiples when an investment is exited.
In relation to greenwashing concerns and future-proofing investment choices, are there any risks or pitfalls when it comes to sustainability investing? For example, if an investment is green today, how can you make sure that it'll be green in 5 years or 10 years?
This is a valid concern. Subjectivity and local politics can mean categorisation of some sustainable activities is susceptible to change. An example is the debate over whether the EU Taxonomy should include natural gas, as a transition fuel which is cleaner than coal but still carries a heavy emissions footprint, or nuclear, as a clean power provider with inherent waste and event risks.
At Triton, we have our own framework of sustainability megatrends and underlying themes, which we interrogate through the lenses of regulatory catalysts, technological advancement, macroeconomic and geopolitical drivers, and consumer preferences. This helps our investment teams to take a directional view on the growth potential of a business case and to try to target investments which will grow faster than the economy, in coming years.
Want to get more insights from Ashim Paun? Secure your spot at SuperReturn CFO/COO and join his session!