The Impact of COVID-19 on Private Capital’s Exposure to Sustainability Issues

Abdulla Zaid, Burgiss

Burgiss has mapped over 50,000 active portfolio companies and properties from the Burgiss Manager Universe (BMU) to the Sustainability Accounting Standards Board (SASB) Standards. The SASB framework includes 26 industry-agnostic General Issue Categories and 195 unique industry-specific Disclosure Topics. Both levels of the framework are grouped into 5 broader Sustainability Dimensions. This article examines the BMU’s exposure, which we have defined as the valuations of the holdings, to the SASB Standards at two points in time: prior to the beginning of the COVID-19 crisis and at present. 

Key Takeaways

• Private capital exposure to Social Capital increased faster than exposure to any other Sustainability Dimension, reaching 80% of the global valuation, with the highest regional exposure level registered in the Middle East & Africa at 88%.

• Global exposure to the Environment Sustainability Dimension registered a timid gain of 1% compared to pre-pandemic levels.

• The top SASB General Issue Category is Energy Management, which affects 65% of the world’s private capital.
  
  

The global economy was severely disrupted by the COVID-19 pandemic, and the ripple effects have touched all sectors to varying degrees. The changes in the global economy were echoed in the private capital markets, fueling shifts in capital between sectors. SASB provides a way to view these sector changes within the BMU through the lens of exposure to the 5 Sustainability Dimensions as well as to the General Issue Categories within each Dimension.

Throughout this article, private capital exposure to or concentration in a sector, an industry, or a Sustainability Dimension is measured by the share of its valuation. Regions refer to the locations of the domiciles or headquarters of the portfolio companies.

Global Private Capital Exposure to Sustainability Dimensions

Over the course of the COVID-19 pandemic, private capital shifts between sectors have spurred a change in the risk landscape, raising new sustainability issues for investors. On a global level, private capital exposure to the Social Capital, Human Capital, and Leadership & Governance Sustainability Dimensions grew considerably. Minimal exposure growth was observed in the Environment Dimension, while a significant exposure decline was recorded in the Business Model & Innovation Dimension. These trends and dynamics were found in most regions, albeit with differences in magnitude.

Figure 1: Private Capital Exposure to Sustainability Dimensions. Data as of Q3 2021. The analysis is based on the aggregated underlying holdings’ valuation of ~ USD 4.8 trillion. Source: Burgiss

During the pandemic, private capital has increased its exposure to Social Capital more than to any other Sustainability Dimension, reaching 80% of the global valuation. The importance of Social Capital has noticeably increased in all regions by varying degrees, driven mostly by the elevated growth in the Technology & Communications sector. The Middle East & Africa has the world’s highest exposure to Social Capital, accounting for 88% of the region’s private capital, while Europe has the world’s lowest exposure with a regional value of 76%. The divergence among regional exposure to this Dimension is attributed to the level of diversification versus concentration in industries that are associated with Social Capital issues. Data Security and Customer Privacy are the most important General Issue Categories within this Dimension, impacting 53% and 37% of the global private capital valuation, respectively.

Figure 2: Global Private Capital Exposure to Social Capital’s General Issue Categories. Data as of Q3 2021. The analysis is based on the aggregated underlying holdings’ valuation of ~ USD 4.8 trillion. Source: Burgiss

Ranking General Issue Categories by Private Capital Exposure

Energy Management is the top General Issue Category, affecting 65% of the world’s private capital. In the Software & IT Services industry, this issue identifies how much energy and water usage is associated with IT hardware infrastructure. This is particularly relevant in the case of data centers, which require a reliable supply of energy and water and where disruptions can have a material impact on costs. In the Real Estate industry, energy use is tied to heating, air ventilation, air conditioning, hot water, lighting, and the use of equipment and appliances. Energy pricing volatility and energy-related regulations represent key issues in Energy Management.

Employee Engagement, Diversity & Inclusion is the second most important General Issue Category, impacting 55% of the global private capital. Disclosure Topics in this space focus on recruiting and retaining a skilled and diverse workforce, especially considering the currently constrained labor market.

Figure 3: Top 5 General Issue Categories in Each Region, Ranked by Share of Valuation. Data as of Q3 2021. The analysis is based on the aggregated underlying holdings’ valuation of ~ USD 4.8 trillion. Source: Burgiss

Moving from the global level to the regional level, the ranking of the General Issue Categories differs from one region to another, reflecting regionally specific private allocation strategies and risks.

Although Energy Management and Data Security are common General Issue Categories across all regions, the Middle East & Africa has the highest exposure to these two Categories at 78% and 67% of the region’s capital, respectively. This concentration of capital is mainly attributed to the boom in the Software & IT Services industry as internet penetration accelerates.

While Product Design & Lifecycle Management is another common General Issue Category in Asia, Europe, and Latin America, the primary causing factor varies by region. The Insurance industry is behind Latin America’s exposure to this Category. The Real Estate industry plays a key role in Europe and Asia, with Asia’s E-Commerce industry being an additional factor in the regional outlook. In the Real Estate industry, the relevant Disclosure Topic is Management of Tenant Sustainability, whereas the E-Commerce industry is focused on the Product Packaging & Distribution Disclosure Topic. Meanwhile, the Insurance industry’s key Disclosure Topics include Incorporation of Environmental, Social, and Governance Factors in Investment Management and Policies Designed to Incentivize Responsible Behavior.

The Big Picture

Today’s investment landscape is increasingly incorporating sustainability as a pillar of capital allocation strategy. Due to the inherent opacity that characterizes much of the private capital market, greater transparency around financially material sustainability issues is crucial for long-term value creation. Understanding private capital’s exposure to the SASB Sustainability Dimensions and General Issue Categories will allow asset owners and asset managers to adopt a more proactive approach toward measuring and managing investment opportunities and risks.