Lessons from Davos: Private Capital and ESG

Davos 2022 saw 2,500 political and business leaders come together to explore the role of government policies and business strategies for post-pandemic recovery and tackling climate change against a ‘backdrop of deepening global frictions and fractures’.

While government policies are of course critical in both contexts, the world is also increasingly looking to business strategies and the role of private investment. Why? Because the scale of the investment needed to achieve global climate and social goals is far beyond what public funds can afford.

As the Intergovernmental Panel on Climate Change (IPCC) put it earlier this year: ‘Governments cannot singlehandedly fund the transition, least of all in low-income developing countries with large sovereign debt and poor access to global financial markets. Long term sources of private capital are required to close the financing gap across sectors and geographies’.

Attendees discussed global cooperation, economic rebalancing, society, equity and global health, nature, food and climate, industry transformation and innovation, governance, and cybersecurity. A key question throughout was, what role can private capital play in each of these areas?

Commentators and international organisations are asking how private investment across different assets classes including private equity, venture capital, private debt and real estate can contribute to positive change in response to social, environmental, and economic stress.

Much of the momentum of the ESG movement (in part driven by a wave of new ESG laws and regulations) has historically been concentrated at the very top-end of the corporate eco-system – i.e., the world’s largest, and typically public listed, companies. But the spotlight is now firmly turning towards private capital, not surprising given its growing value and reach.

Net asset values across private equity portfolios are at $5 trillion and growing, turning over every four to five years[1]. This means that private capital could touch a third of the global economy over the next two decades. With that kind of scope and influence, it has the potential to drive ESG practices into company strategy and execution with great impact.

While much of the developing conversation about private business and ESG to date has been about how to improve transparency and extract more ESG data from privately owned companies through adapted reporting standards, reports from Davos suggest there were many conversations highlighting opportunities for leadership on ESG issues across global private investment portfolios.

One stakeholder session focused on digital inclusion asked the question: ‘How can we mobilise private capital and foster a cooperative policy environment to generate more investment in the digital economy? Another focus group on embracing climate adaptation asked ‘how can public-private partnerships in areas such as technology, finance, and innovation both create business value and strengthen climate adaptation?

Building on the work of the Humanitarian and Resilience Investing Initiative in 2019 which focuses on harnessing private capital to strengthen the resilience of the most vulnerable communities and economies, a new World Economic Forum paper[2] released in May at Davos describes how new types of partnerships can unlock impact at scale, heralding new opportunities for corporates and investors to expand involvement in humanitarian contexts beyond philanthropy and charity.

Kerry is a Partner, Responsible Business & Pro Bono, Emily Sutton is a Knowledge Development Lawyer (New Zealand Qualified) at Charles Russell Speechlys.

[1] Private equity should lead the charge on ESG strategy | World Economic Forum (weforum.org)

[2] World Economic Forum Calls for New Partnerships to Generate Private Capital for Fragile Communities > Press releases | World Economic Forum (weforum.org)