Private equity – a powerful driver of sustainable investment

The business case for investment in green energy is often unclear as policymakers can struggle to create the stability in which such businesses thrive, and new technologies are unproven or uneconomic without significant subsidy. So, when private equity companies step in, they tend to invest in businesses with climate-oriented strategies which are less reliant on government policies or subsidies; and if they see a strong business case they will invest at scale.

Cubbon points out that there is often a perceived conflict between investment in climate-friendly approaches and return on investment. This perception is at times erroneous as business models exist which deliver both carbon reduction and strong financial returns.

Private equity is effective at identifying such opportunities and backing the leadership teams involved, he says. That is not to say there is no risk. When backing new technologies or services targeted at traditional sectors, such as energy, Cubbon says it should be recognised that some ventures may not deliver, but that is the kind of risk private equity has always had to assess.

In terms of overall governance over sustainability, the boards on which Cubbon sits approach this differently. In addition to sitting on the board of D2Zero, Cubbon also sits on the board of an employee-owned manufacturing company whose board has a classic committee structure where sustainability is embedded as part of business strategy but tracked through the risk committee, with elements covered in the remuneration and audit committees. By contrast, at the board of the private equity owned company (D2Zero), the whole board considers sustainability without devolving this to a specific committee.

“What I've learned through Chapter Zero is that the classic sustainability committee may well comprise the key participants of the board, but on the D2Zero board we consider all aspects of sustainability as a whole board,” says Cubbon. “Zero carbon is very much part of the overall strategy, both for ourselves and our customers. It is addressed in the company’s mission and purpose and we are collectively responsible as directors for driving that agenda.”

More broadly, it is not unusual for private equity-funded businesses to prefer a faster moving, dynamic and less committee orientated board environment where issues are addressed quickly in an entrepreneurial style, he says. “Private equity companies often take companies private from public, partly because they think they can bring more energy to them and spend less time on reporting and heavy governance while, of course, still meeting all regulatory obligations,” says Cubbon. “Maybe that's part of it.”

Interestingly, at a recent Chapter Zero event with Deloitte, the observation was made that some chief sustainability officers are moving from what might be seen as a siloed function reporting to their own committee, to more of a board level ‘chief strategy officer’ type role. This positions net zero alongside other major opportunities and threats faced by the board, such as AI technology, cyber and geopolitics. Maybe this is a move towards the PE approach, he suggests.

Funded by private equity; committed to sustainability

D2Zero combines six established companies with deep expertise in critical energy infrastructure, each offering unique capabilities and technologies to optimise and decarbonise traditional energy production and distribution. It is backed by private equity company SCF Partners.

With a presence in North America, Europe, Asia-Pacific and the Middle East, SCF has a long history of supporting entrepreneurs as they build companies to increase the reliability and decrease the cost of energy globally. The model is classic private equity: it raises funds from investors in a series of equity rounds and then uses those funds to invest in businesses; with a specific focus on the energy sector.

“SCF Partners seeks to explore the global dilemma of the inevitable increase in demand for energy while the world looks to reduce global temperatures and emissions,” says Cubbon. “Although one may think that private equity companies are very much driven by relatively short-term financial returns, SCF Partners takes a longer view on structural themes, and it sees opportunity in helping to resolve this dual challenge.”

The private equity company is also a founding partner in a US organisation called OpenMinds, which is a grouping of experts on both sides of the energy and climate agenda comprising scientists, consultants, analysts and others who have come together to understand the pathways to solve for the dual challenge, including methane abatement and accelerating green energy sources, such as nuclear energy, wind power and carbon capture.

With this in mind, SCF examined its existing portfolio in Europe and grouped its energy transition-relevant businesses, such as Score and Hydrasun, under D2Zero. “When it looked at its portfolio of businesses out of the Aberdeen office, it identified six businesses which supply equipment and services to the energy sector and have a common purpose,” says Cubbon. “Each of them also has similar customers looking at how to optimise energy use and reduce carbon.”

Geopolitics are ever present on both boards

There are always externalities to address, however smart the investment and route to market. “Geopolitics are discussed in every board meeting – there are some obvious subjects, such the impact of tariffs on exports,” says Cubbon, adding that UK and US Governments’ diverging energy policies are also often high on the agenda.

“This is where the non-executive director comes into their own; they are there to bring an external perspective. Part of our role is to ensure that our executive team is not operating in an internal bubble. We must bring those insights – and this is something Chapter Zero helps me with. By attending a Chapter Zero event, you get to see and talk to people who are also in that big, wide world; and we can share experiences.”

Cubbon is also keen to challenge any despondency around decarbonisation. “To my mind, these things are cyclical. We had a dotcom bubble 25 years ago which burst but the internet has just continued to grow ever since,” he says.

He is convinced that the chatter around decarbonisation may be quieter at present, but it has not gone away. “Organisations and countries that continue to push ahead will ultimately come through stronger in the future; and if you look carefully, many projects in this area are investable and should not be missed,” he concludes.