| Hello, I’m Debra McCoy, a partner at Bain and our global lead for Capital Markets, Sustainability, & ESG. I’m guest-editing this edition of our Private Equity mailing to share my observations from recent World Economic Forum meetings I attended in Davos, Switzerland. It is a serious time, with an active war exacerbating hunger for those already suffering from persistent poverty. In Davos there was an evolving recognition of the costly tradeoffs that investors, governments, and communities are making as sustainability considerations become more central. The narrative that “financial portfolios must lead” will remain prominent given the influence that investors’ decisions have on future economic structure, jobs, families, and the energy transition. As my colleague and Davos collaborator Christophe De Vusser, head of Bain’s EMEA Private Equity practice and member of our Board of Directors, noted, “I was surprised that private equity investors were not as publicly involved in the energy transition dialogue as were banks, insurers, and traditional asset managers. I think financial investors need to address climate considerations—not narrowly, but in a more comprehensive way. Many private equity firms invest in energy transition by creating product and service advances. This is necessary and is driving returns for the Limited Partners (LPs) who have invested with these General Partners (GPs). What is more challenging is that ‘hard-to-abate’ [carbon] activities are increasingly avoided by financial investors. This stands out because so many of these GPs have skills and the teams to do the difficult work of decarbonizing assets while at the same time driving value in strategy and operations.” Christophe’s observations point to the growing awareness of tradeoffs between short and long horizons, as well as potential penalties and needed value creation. Some asset owners—pensions and other institutional allocators—have decided that while the goals of carbon and climate coalitions can be relevant, they are not willing to commit their investment policies and allocation decisions to a fixed set of external frameworks, or even principles. Certain LPs actively embrace more exposure to the energy transition through holding assets in hard-to-abate sectors, in order to fully participate in decarbonization and reap what they believe will be the financial upside of innovating to shift those assets toward a different future. A potential tradeoff in this “high abatement” scenario is the potential for longer holding periods required to deliver expected returns, something that some but not all LPs can allow. There was also some critique—at times, quite sharp—of GPs who have declined to join climate and carbon coalitions. The range of perspectives among investors and their stakeholders was wide, and made me reflect on a recent report I co-authored with Bain colleagues and ILPA, the Institutional Limited Partners Association, which highlights diverse LP perspectives about ESG in their investment decisions. I’m also sharing resources below that provide additional insights. One final note: Complexity is always with us—acknowledging tradeoffs and costs alongside growth and value creation is challenging, but is needed for greater transparency in decision-making and innovative paths forward. Be well, Debra | 