“We don’t wave an ESG flag at all,” said Federation Asset Management head of distribution Cameron Farrar at the Australian Wealth Management Summit earlier this month.
In fact, he said, the fund manager is somewhat cautious about doing so, given the risk of being associated with greenwashing – something that has tainted parts of the industry.
“We kind of let investors draw their own conclusion. We like the maths that sits behind ESG investing,” Farrar said.
Farrar noted a clear shift in private market demand, highlighting a definite momentum from investors wanting exposure to the kinds of assets Federation Asset Management manages.
“There’s been a push in the private market space for people who want access to the assets that we own – wind farm developers, large utility scale batteries, we own New South Wales largest operational battery down in the Riverine region. People like to have access to those kinds of assets,” he said.
Farrar pointed to Windlab as a standout example of success.
Originally established to bring CSIRO-developed technology to market, the company spent years as a little-noticed microcap on the ASX. That changed in 2020, when Federation and Squadron acquired it and took it private at an enterprise value of $67.1 million.
“The public markets didn’t love it because the revenue profile of such as asset is really lumpy. And it became untraded, illiquid, unloved, and it’s kind of thrived in the private markets space and we’re doing a lot with that business,” Farrar said.
Today, Windlab leverages its proprietary WindScape technology to identify and map large-scale wind energy development sites with precision.
Private markets, Farrar underlined, offer access to sectors not readily available in public markets.
“The ESG component is strong,” he said. “Yes, it starts in the high net worth, ultra-high net worth area, but that’s filtering across the whole market now.”
Speaking more broadly about alternatives, Farrar noted that private equity is already a feature in many portfolios and those yet to make the move are likely to follow suit in the near future.
In a paper last December, EY-Parthenon’s global private equity ESG leader, Chase Jordan, explained that private equity has become one of the most effective channels for investors to access meaningful ESG exposure.
“Today, a growing majority of funds have incorporated environmental, social and governance principles into their deal making and value creation playbooks, recognising ESG as a relevant driver of financial performance,” Jordan said.
“A recent EY-Parthenon study shows that funds that are excellently positioned on ESG can realise an internal rate of return up to 8 percentage points higher than their competitors,” he added.
Ultimately, Jordan said private equity is best positioned to deliver its strongest results when shareholder and societal value are treated as on.
Data from the Responsible Investment Association Australasia (RIAA) previously revealed that a lack of transparency in private markets makes it difficult for fund managers and advisers to assess them from an ESG perspective.
According to Preqin, 60.5 per cent of private markets assets under management are overseen by a fund manager with an active ESG policy. This figure drops to 52.8 per cent for private equity specifically.
Estelle Parker, co-chief executive of RIAA, said: “The lack of transparency in private markets presents a challenge. The demand for clearer ESG data is growing across the board and investors are driving this change to make better, long-term decisions.
“Data providers can struggle to obtain ESG data from unlisted companies as they often tend to rely on publicly available information.”
The issue affects not just investors, but fund houses as well. Namely, research by State Street found that 61 per cent of private market managers believe including ESG information would make their funds more attractive to retail investors, however, many identified quantifying ESG risk as a key challenge.
In its 2024 Private Markets Outlook: Headwinds & Tailwinds report – based on a survey of 500 global investment institutions – State Street noted that both fund managers and their investor clients are “having trouble” assessing ESG-related risks in private market opportunities.
More than a third (37 per cent) of respondents reported difficulties in both producing and obtaining non-financial data, such as ESG metrics.
