Future Returns: ESG-Related Ventures Are a ‘Bright Spot’ in Private Markets

An uncertain economic outlook, higher rates, and geopolitical instability, are all causing late-stage venture capital, private equity, and corporate finance funds to scale back their investments. Companies that are creating products and services related to environmental, social, and governance, or ESG, policies, however, continue to attract financing, according to a recent report from Deloitte. “It’s kind of a bright spot in the sea of ​​all the bad news,” says Heather Gates, audit and assurance private growth leader at Deloitte & Touche, the accounting arm of Deloitte in the US Using data from PitchBook, a Seattle-based data and analytics firm that follows the private markets, Deloitte looked at 330 completed deals totaling US$15.7 billion through the third quarter last year in a quarterly analysis of financing trends, titled “Road to Next.” The deals involved companies in three sectors related to ESG—climate technology, clean-technology, and companies that support impact investing with reporting tools and software to track ESG factors. “These three sectors span nearly all of the hardware and software products, tools, and services, plus business and investment models, that are being developed to implement many ESG policies and initiatives,” the report said. Deloitte’s focus is on so-called expansion stage companies, which have proven ideas and solutions they are working on to bring to market, Gates says. According to the research, there are now 36 expansion-stage ESG companies that have reached so-called unicorn status, with valuations of US$1 billion or more. That includes nine that got there in 2022. The aggregate valuation of all 36 companies is US$83 billion, the report said. Most of these ESG deals involve clean-tech firms, such as Mainspring Energy, a clean-power company that’s creating a low-emission generator to convert multiple fuels into electricity. Mainspring, based in Menlo Park, Calif., received US$290 million in financing led by London-based Lightrock, a global growth equity investor, in September. Penta recently spoke with Gates about why ESG-related companies continue to draw private investment. What’s the Attraction to ESG? A global trend to cut carbon emissions that is supported by governments and investors, and increasing regulatory scrutiny, continues to put ESG companies in the spotlight, Gates says. The US Securities and Exchange Commission is getting closer to issuing requirements for corporations to measure and disclosing their carbon emissions and other climate-related risks, for instance. “It’s a matter of time before this gets finalized,” Gates says. At the same time, there are many companies with robust financial systems “that don’t have systems in place to measure what we are talking about here,” she says. As a result, investors have been attracted to emerging software firms that make it easier for companies to collect, report, and analyze the required data. An example is Xpansiv, with headquarters in San Francisco, which has created an infrastructure platform for global carbon and environmental commodities. The company has market data for carbon offsets, renewable energy credits, and low carbon fuels and can connect buyers and sellers. It received US$400 million from Blackstone Energy Partners, a division of the private-equity firm Blackstone, in July. Other examples include a San Diego-based company called Measurabl, which has an ESG platform for real estate, and Novata, a New York company backed by philanthropic organizations in addition to for-profit companies, that has created an ESG platform for private markets. ESG Unicorns Other unicorns with an ESG focus that PitchBook has tracked include UPSIDE Foods, Oyster, and Palmetto. UPSIDE Foods in Berkeley, Calif., achieved its US$1 billion status when it received US$400 million in financing in April led by Singapore’s state-owned investment company, Temasek. The funds will help it build a commercial production facility to make so-cultivated meat products out of cell feed. Oyster, a social-impact company that facilitates companies to hire workers from anywhere (including internationally), reached the US$1 billion level after obtaining US$150 million in financing led by Georgian, a Toronto-based financial-technology company, in April. According to Oyster, it facilitates companies in making high-quality employees from anywhere in the world without disrupting individuals, the communities where they live, and the urban and natural environment. Another recent unicorn is Palmetto, a clean-energy marketplace and technology services platform from Charleston, SC, that is accelerating the adoption of residential solar. Palmetto raised about US$375 million in February in a financing round led by Social Capital, an investment firm in Menlo Park, Calif., that focuses on technology companies at all stages that are making products to improve society. Deloitte points out that the proliferation of unicorns within ESG “reinforces that business viability is increasingly being realized.” But it also is an indication of fewer exits to the public markets during a time of extreme market volatility. Founders, management, and their investors typically prefer young companies to eventually go public. That’s because they generally would earn a premium to the company’s value through a stock offering rather than through an acquisition, Gates says. But historically, it’s not unusual for about 80%-85% of entrepreneurial ventures to get bought and only 15%-20% go public, she says. In any case, today “the market is closed,” she says, with the number of initial public offerings down to practically nothing. The dynamics are unlikely to change until markets become less rocky—perhaps in the third quarter this year, she says. One trend that is likely to accelerate is venture funds selling their stakes in ESG-related companies to large private-equity firms, Gates says. “Both venture capital and private equity have raised billions in the past five years and they need to do something with that money,” she says. “Once we see stability, we might see an uptick in more private-equity investments.”

Leave a Comment

Your email address will not be published. Required fields are marked *