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Road to Smart Olive

Ewen Cameron Watt, Editor-in-Chief, Macro Forum, Actis, London

Shami Nissan, Partner, Sustainability, Actis, London London

Torbjorn Caesar, Chairman and Senior Partner, Actis, London London Luxembourg

James Magor, Director, Sustainability, Actis, London London Luxembourg London

Supporting the Energy Transition – moving the world away from carbon-intensive energy production towards a zero-carbon future – is at the heart of many of Actis’ investments. Whether it is investing in renewables, or converting more carbon-intensive power plants to use of greener fuels, sustainability sits at the heart of our investment philosophy.

But how do we ensure that our investments deliver a positive impact while also making the long-term, stable returns that investors need? Our Senior Partner, Torbjorn Caesar and Head of Sustainability, Shami Nissan discuss how Actis’ strategy is evolving, and the tools we use to help make our investment decisions.

Ewen Cameron Watt: How important is the Energy Transition, both for investors and for the sustainability of the planet?

Shami Nissan: The Energy Transition is mission critical for our planet’s future.  The landmark 6th Assessment Report from the UN’s Intergovernmental Panel on Climate Change (IPCC) provides the strongest scientific evidence yet of how global warming is impacting the planet and sets out implications of various warming scenarios.

The world is likely to temporarily reach 1.5°C of warming within 20 years even in a best-case scenario of deep cuts in greenhouse gas emissions.  This will lead to further “unprecedented” extreme weather events, such as floods and heatwaves, which are expected to become more frequent and intense.

Although warming could still be capped, the report indicates some changes that have been set in motion are “irreversible”, including sea level rise. Poverty and inequality naturally follow given limited financial headroom for necessary capital expenditures and limited social security nets.

A zero carbon future necessitates a whole economy transition. Within that, the energy sector, currently responsible for 40% of carbon emissions, is key. A successful Energy Transition is therefore vital in ensuring the climatic stability of the planet, and in turn paving the way for stable societies and prosperous economies – both of which are important to securing investment outcomes. This is our home ground and we feel this allows for meaningful initiatives on our part.

Torbjorn Caesar: The long-term sustainability of the planet is incredibly important to investors, and will become even more so.  After all, they are human beings themselves, they worry about the future of the planet like everyone else. And don’t forget the people behind many of our large institutional investors, such as teachers, police officers and civil servants, worry about this too, and want their money used in a long-term, sustainable way.

It is also a fantastic investment opportunity. Energy demand will double over the next 20 years, so there will need to be investment not only to ensure that current and future demand can be met sustainably.  Much of this electricity demand is thanks to the economic growth coming from the parts of the planet where 80% of the population lives, such as Asia, Africa and Latin America. That is where we have our unique footprint. If you can forgive the mixed and non sustainable metaphor we are on the ground and at the coal face.

Thinking about supporting the Energy Transition is also important when it comes to investing in other global themes. Digitalisation – which is driven by long-term trends towards increased use of data – will also continue to offer huge opportunities for investors, but they need to make sure the extra energy supply needed to manage all this data is carried out in a sustainable way.

Ewen Cameron Watt: So with that in mind, how does Actis decide which investments are appropriate to meet the needs of the Energy Transition, and which to avoid?

Shami Nissan: We have developed a transition tool to inform and aid the investment decision-making process. he tool helps us assess whether each investment we make is aligned to a net zero future, such as renewables, which we would deem as being Green, or net-zero-misaligned, such as coal. But between renewables and coal – there are other investments/assets which we call Olive.

That doesn’t mean we cannot invest in Olive, but we need to ask key questions around the transition risk of that business, to understand whether it is vulnerable to dilution of value in the future. And then we need to consider what we can do during the time of our ownership to repurpose it, to move Olive assets closer to the Green end of the scale.

For example, a data centre that is powered via the grid in a heavily coal-dependent country could perhaps be switched to using renewable energy. That would be an example of how an Olive asset could become Green.

Torbjorn Caesar: Thanks to our presence on the ground, we can see the deal flow of opportunities where capital can be invested to drive the Energy Transition, and we can pick and choose where we see the best risk-return.

The countries where we have a significant presence and a unique competence set are precisely those where the most investment is needed, because electricity is in short supply, yet there is less capital chasing those opportunities than in developed markets. But as Shami said, investors also need to consider not just how the potential asset looks today, but how it will look tomorrow. You need to have a view about what this company, in this sector, in this country will look like for the next 20 or 30 years.

Our long-term transition tool is crucial to get visibility on how an asset will be viewed when we come to sell it. This is not something you can just put in a spreadsheet, you need to make a judgement about the future, and that is why the tool is so important.

Ewen Cameron Watt: One of the most debated topics within the Energy Transition is the role of gas. On the one hand it is less polluting than oil and coal, but it is still a fossil fuel. Does investing in gas meet the demands of the Energy Transition and what is Actis’ view about investing in the sector?

Torbjorn Caesar: Gas is an important transition fuel. There are many periods when the sun doesn’t shine or the wind doesn’t blow, and as there isn’t yet enough battery capacity to store renewable energy, there is still a need for fuels like gas. So it’s perhaps useful to think of gas as something that enables renewables to happen, it provides the capacity to build out a renewable base.

But as we said earlier, as investors we always have to think about what the investment will look like in the future. And the issue is that, in a decade or so from now, there will be many financial institutions who will not invest in gas. So thinking ahead we need to be careful, but until then gas is a big opportunity and serves a huge global need in supporting the transition.

Shami Nissan: We should also remember that in many of our markets there is not the opportunity to shift to renewables overnight. That is not a viable option as the infrastructure isn’t there.  When considering the role of gas, it is important to apply a country-specific lens and to invest in assets and solutions which enable renewables to scale in time.

In this context, gas has a critical role to play in accelerating the Energy Transition, in particular when substituting more carbon intensive alternatives (e.g. coal, heavy fuel oil), when harnessing indigenous reserves and in recognition of the fact that power generation is correlated to GDP growth in many of our markets and therefore this approach enables economic progress.

We have previously invested in converting a heavy fuel oil operation to gas: that is an example of transitioning ‘in action’ and in terms of decarbonisation, has important real-world impacts. Clearly, a net zero future requires trillions to be invested into new renewables infrastructure, however in isolation which will not suffice to secure a net zero future – we must continue to invest to decarbonise and transition all sectors, including gas, and the so-called hard to abate sectors.

For example, gas may stay in the energy mix in 2050 but it’s role will likely transition away from baseload to providing peaking capacity. We also look at upstream emissions and initiatives like the Responsibly Sourced Gas certification scheme will further help to reduce emissions from gas value chain.

Finally, as Torbjorn alluded to, the role of gas in providing stability to the grid in many emerging countries is absolutely critical for the power system as a whole and is indeed a means of stabilizing the infrastructure to support the rapid scale up of renewables.

Ewen Cameron Watt: Once the decisions about where to invest have been made, how does Actis monitor its investments, to ensure they are still meeting the requirements of the Energy Transition?

Shami Nissan: We have always had Environmental, Social and Governance (ESG) key performance indicators, but in addition to that we apply our impact measurement framework to assess how our investments contribute to the United Nations’ Sustainable Development Goal (SDG) number 7, which is about clean, affordable energy.

We also look at other social aspects, such as job creation, job quality, female representation, how widely value/ benefits are shared across communities and remote areas: to keep our social licence to operate but also to change people’s lives for the better. It’s about enabling them to boost their own economic prospects through initiatives such as upskilling and vocational training, helping them get better jobs with higher salaries and other measures which transform livelihoods.

We are actively working to ensure that the transition away from fossil fuels in our markets is a Just Transition with the substantial benefits of a green economy shared across society.​

Ewen Cameron Watt: That all sounds very positive when it comes to the impact on the lives of the people and of the communities Actis invests in. But how do investors react to this way of thinking? Are they not still simply focused on yield?

Torbjorn Caesar: The ideas both of making a positive contribution and of making the right financial return are converging. And the speed that they are coming together is remarkable. Five years ago, there was a perception that there was no connection. Now people understand that focusing on values also drives financial value.

Investors are also realising that their returns elsewhere are low, so they need to move capital into alternative assets, seeking long-term, stable transactions with a good yield. One challenge however has been that in the past many investors were perhaps too focused on simply spreading their capital across different parts of the world rather than thinking globally.

That can be a limitation, because the issues we face are relevant to the whole planet:  if we want to cut carbon emissions, we need to do it everywhere, not just in one region. We at Actis are right in the middle of where capital flows and opportunity come together, whether it is for energy that promotes the transition, or for the digital infrastructure needed to support the economies in the growing countries of the world.

Shami Nissan: The last few years have seen a sea change in this agenda: on sustainability, on climate and on impact. We are at a tipping point on this topic, it is here to stay.  These are fundamentals that drive value and stability and are needed to create a prosperous society.

This is all now hard-wired into business and civil society and, increasingly, the investment community. And investors are now prepared to move forward at a much faster pace than they were in the past.

Torbjorn Caesar: You are right about civil society: public opinion also matters here. People see the impact of climate change all around the world, and also on their daily lives. That means governments have to move quickly to address the issues.

Shami Nissan: And the impact of climate change influences next-generation talent too. It changes the contract people seek with their employers. Younger people want something very different to previous generations when they make decisions about which jobs they want to have and for which companies they want to work.

So, integrating sustainability is vital to companies if they are to attract the best employees in the future.

Ewen Cameron Watt: What does this all mean for Actis? Does it change the places or countries you might invest in, and the investor partners you might work with?

Torbjorn Caesar: We are lucky at Actis to be in the right place at the right time. When it comes to big trends such as the Energy Transition and digitalisation – with all the infrastructure and logistics behind it – we are experts in the markets where 80% of the population of the world lives. So, we have a fantastic opportunity.

We aren’t just experts in emerging markets, we are global thematic investors in areas such digitalisation, sustainable energy and infrastructure. And the emerging markets themselves present probably the biggest opportunities in these areas. So, the opportunity we have is massive.

Shami Nissan: The sun shines brightest and the winds blow strongest in our markets. So, when it comes to the Energy Transition, it makes sense if you are a global investor to work with us to achieve the returns you need. It also makes sense if you want to have outsized sustainability outcomes, because the places we work in are where the world’s needs are greatest.

Torbjorn Caesar: I take the view that we have three distinct competitive advantages. First, our footprint – 17 offices, 300 people, 600 board members, 120,000 employees in our portfolio companies – gives us a huge base on the ground where we are investing.

Second, our operational capabilities mean we act like industrialists who are working in the investment space, which means we understand the complexities of infrastructure investing. Third, our belief that values drive value is in our DNA. This is who we are, it sits at the heart of everything we do, it isn’t just a case of us jumping on a trend. That makes us different, and different is good.

Shami Nissan: I’d also point to our track record. We aren’t a firm that talks about what are planning to do, we have been doing investing to generate both compelling returns and sustainability outcomes since our inception.

Actis was founded with this investment mindset, and hence we have decades behind us of integrating sustainability fully into our processes. It’s something we have had from day one, it isn’t something we have just dialled-up or bolted on.

Key IPCC Findings

Global warming: 0.95 to 1.2C, since late 1800s. Surface temperature has risen faster since 1970 than in any other 50-year period over at least the past 2,000 years

Global warming under very low emissions scenario: temperature rise of 1.5°C by 2040 and 1.6°C by 2060

Global warming under very high emissions scenario: carbon emissions triple, warming could reach 1.9°C by 2040, 3°C by 2060 and 5.7°C by 2100

Sea levels under very low emissions scenario: rise of about 0.35m by 2050 and 0.5m by 2100, compared with 1900 sea levels under very high emissions scenario: rise of about 1m by 2100

Sea levels in case of complete ice sheet melt: rise of about 65m

Arctic: likely to be ‘practically sea ice free’ in September at least once before 2050

Ensuring a Just Transition

At Actis, we are proud to play a part in financing the energy transition, and through increased availability of electricity contributing to economic growth and social progress at a macro level.

At a more localised level, our values-drive-value approach ensures we focus on our licence to operate – our businesses deliver tangible, measurable benefits to local communities so that the value we create is shared with our stakeholders.

This includes local job creation, training/upskilling programs to improve employability and boost income-generating activity, providing access to electricity, safeguarding ecological systems and addressing key developmental needs. In this way, the energy transition in which we invest is an inclusive and equitable one.

This is the Just Transition.

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Ewen Cameron Watt

Editor-in-Chief, Macro Forum, Actis, London

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Shami Nissan

Partner, Sustainability, Actis, London

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Torbjorn Caesar

Chairman and Senior Partner, Actis, Luxembourg

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James Magor

Director, Sustainability, Actis, London

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