President Joe Biden’s $2 trillion infrastructure proposal has been called transformative. I describe it as accelerative.
There’s a sense in the United States that the plan won’t be pushed to the side like others in the past. The favourable odds reflect more than politics and popular Main Street sentiments. Yes, Americans are fed up with poorly maintained roads and bridges – not to mention needed telecom and other physical infrastructure updates. Yes, Democrats hold a (slim) majority in Congress. Sure, the coronavirus has highlighted the need for economic stimulus. Less discussed, however, is how the investment community is already on board with the important environmental, social and corporate governance goals that the package seems to be aiming towards.
PE managers have been devoting more attention to climate change and clean technology in recent years for obvious reasons. Hurricane Sandy flooded Lower Manhattan, the financial center of the world. A deep freeze shut down Texas, the energy hub of the US. The pandemic exposed how America’s public health system was woefully inadequate for ordinary people. The perfect storm of concerns related to these natural disasters has increased investor awareness as well as heightened the scrutiny on ESG practices – and funds are starting to react.
Biden’s infrastructure plan squarely addresses the conditions that gave rise to these shifts. Managers are now in a position to either jump on the ESG locomotive they’ve been waiting for or miss out on a big chunk of the boom that Jamie Dimon recently said could last through 2023.
Many in private equity were disappointed that Biden’s infrastructure plan didn’t propose public-private partnerships, which would have given them an opportunity to finance and reap dividends from some of the costlier projects in the plan, like the reconstruction of the 10 most economically significant bridges in the US. But the same investors should find other opportunities in Biden’s plan.
Construction companies are going to be extremely busy in the coming years if the plan becomes law. That means a range of companies will see significant uptick in sales, from steel manufacturers to movie theatre chains. For funds, the calls should be easy. The opportunities are obvious and abound. Funds just have to choose – but do so quickly.
The White House has even provided guidance for drafting investment criteria to take advantage of the spending. That guidance centres on ESG. Biden’s plan explicitly favours American firms and initiatives that aim to curb carbon emissions and combat climate change, like electric vehicles and power plants. It targets specific, often-neglected industries like affordable housing and childcare. Furthermore, it’s going to foster efforts to address racial inequality, social injustice and gender bias.
The question that private equity managers should be asking themselves at this moment is whether or not they possess the in-house expertise or external partners to analyse those ESG objectives, look for gaps and opportunities, and act on them. Many have been on the fence about ESG investing, which in some quarters is still derided as a soft-headed excuse to foolishly chase something other than profits. But I’d argue that ESG data is exactly the sort of alternative data that smart private equity managers have long sought to gain unique takes on companies.
The reason these insights matter is because most – not all, but most – investors today want to see action, not lip service, on environmental sustainability, social justice and good corporate behaviour. Private equity funds that take these themes seriously, implementing ESG guidelines and strategies and developing new models and perspectives, aren’t just going to appease their institutional investors, they’re going to grow their businesses.
It’s all about the timing and pace of change. The funds that have ESG plans in place now – or put them in place quickly enough to take advantage of the growing demand for sustainably-run organisations and projects, like the companies contracted to realise Biden’s infrastructure plan – are the ones that will come out on top. Private equity firms that had been resisting were already behind the curve. The Biden plan, if enacted, could very quickly force them out, or force them to rapidly change. That’s what I mean by accelerative.
If anyone in private equity is on the fence about ESG, there’s a clear side that they should fall towards if this plan moves forward.
Elaine Chim is the head of private equity, Americas and APAC at Apex Group