HarbourVest's Annual ESG Report

Natural capital

The World Economic Forum estimates that over 50% of global GDP is heavily reliant on ecosystem services, which are the benefits that humans (and, inherently, businesses) receive from the natural environment.13 In its 2022 Living Planet Report, the World Wildlife Fund (WWF) reported an average decline of 69% in species populations since 1970. The Global Forest Watch estimates that the earth has experienced a 12% net tree cover loss since 2000.14 And a global population that boomed from 2.5 billion people in 1950 to 8 billion in 202215 is reliant on the same, finite freshwater supply that is shared as drinking water supply and for economic purposes such as agriculture and certain cooling systems. The bottom line: our global economy is heavily reliant on a natural environment that is in rapid decline.

This means investors, like HarbourVest, must increasingly be cognizant of two key aspects of an investment’s relationship to nature:

  1. An investment’s reliance on nature-related systems to support its supply chains and operations, where the rapid loss of biodiversity may have a material impact on the business’ ability to operate as expected and without disruption.
  2. An investment’s impact on nature, where it may be furthering (negatively impacting) or seeking to reverse (positively impacting) the key factors that drive biodiversity loss.

With a landmark global agreement on halting and reversing nature loss by 2030 reached among 188 governments in December 2022 at the United Nations Biodiversity Conference in Montreal (COP15) and a Taskforce on Nature-related Financial Disclosures (TNFD) that set forth recommendations in September 2023 for how entities, including investment managers and asset owners, should disclose nature-related risks, the course is set for nature and biodiversity to follow in the footsteps of climate change as a common part of the investment vernacular.

A report entitled Nature Positive: The Next Horizon for Investors, published by the Private Equity CEO Taskforce of the Sustainable Markets Initiative (PESMIT), in partnership with Boston Consulting Group, outlined how private equity investors, in particular, are well-positioned to drive positive change for natural systems and biodiversity, and the steps they may consider in developing such a strategy:

PE Biodiversity strategy

Our impact assessment

We believe that as nature-related risks increase, it is becoming an imperative to better understand how these risks and dependencies affect even a highly diversified investment portfolio. During the past year, we conducted a preliminary analysis in line with step 1 of the PESMIT guidance to “assess impact.”

Analysis

HarbourVest sought a high-level understanding of our investment portfolio’s impact on natural capital from a sectoral angle. We utilized data from the publicly-available ENCORE (Exploring Natural Capital Opportunities, Risks and Exposure) tool, designed as a useful entry point to nature-related assessments, particularly for financial institutions “to identify nature-related risks they are exposed to through their lending, underwriting, and investment in high-risk industries and sub-industries.” The analysis yielded these preliminary insights:

  • Due to the size and diversification of sectors across HarbourVest’s total portfolio, there is a broad distribution of nature-related impacts. While a total portfolio view is useful in setting an overall baseline understanding of our natural capital impacts, a sector-focused approach in future analyses will help us understand the most material exposures within our portfolio.
  • The chart below illustrates the distribution of HarbourVest’s nature impacts based on the top 10 sub-sector exposures within the HarbourVest portfolio. Based on our preliminary analysis, the most prominent (and therefore material to HarbourVest) impacts are water use, water pollutants, and soil pollutants.

Natural capital impacts of top sector exposures

No Data Found

Natural capital impacts of top sector exposures

No Data Found

  • This exercise demonstrated the importance of identifying material natural capital risks to a portfolio by calibrating it to sector exposures. This notion can be carried through to our interactions with GPs, in recognizing that a portfolio mostly consisting of, for example, financial services companies may have relatively less impact on nature as compared to a portfolio of industrials or manufacturing companies.
  • While investment-related nature research has taken meaningful steps forward—and enabled preliminary analysis of this sort—there is need for more robust research and data completeness to understand the impact of all sectors on drivers of nature loss.

Future steps

We view this preliminary analysis as a helpful step toward developing an understanding and approach to managing nature-related risks in HarbourVest’s portfolio. However, we acknowledge that we have hardly scratched the surface, as there are several other dimensions to consider in future iterations of our analysis, such as our investments’ reliance on nature and biodiversity and a geographical perspective on our portfolio’s interaction with nature.

Our next steps include continuing to learn about the nature landscape and how we, as an indirect investor, may best develop an approach to managing our investments’ impacts and reliance on natural capital. We will also seek to disclose our efforts in alignment with emerging industry best practices, such as the TNFD. We look forward to keeping our stakeholders informed of our progress as we begin this journey.

Private Equity CEO Taskforce of the Sustainable Markets Initiative (PESMIT)

Through co-CEO, Peter Wilson, HarbourVest is a proud participant in PESMIT. The Sustainable Markets Initiative was launched at The World Economic Forum in 2020; its mission is to build a coordinated global effort to enable the private sector to accelerate the transition to a sustainable future. PESMIT was launched in 2021 and marks the first time that the private equity sector has united at the C-suite level to drive action on sustainability. PESMIT is focused on three areas: climate action through carbon pricing, ESG metrics, and biodiversity risk.

In 2023, PESMIT published Nature Positive: The Next Horizon for Investors, a comprehensive business case for the consideration of biodiversity risks and opportunities in investments. Our collaboration with other action-oriented private equity leaders has inspired our initial steps of understanding the market of biodiversity data, utilizing a PESMIT-recommended tool (ENCORE), and mapping our portfolio impact on a sector basis.

Continuation solutions encompass a host of transaction types in which a GP secures interim liquidity and/or additional primary capital for their LPs in a strongly performing asset, or set of assets, that the GP will continue to own and control. Specifically, they include continuation funds, new funds created by GPs for the purpose of acquiring the asset(s) that continue to be managed by the same GP and capitalized by one or several secondary buyers, or equity recapitalizations involving a direct equity or structured equity investment into a portfolio company. These transactions can also include a parallel investment from the GP’s latest fund into that same pool of assets (a “cross-fund trade”).