Despite the growing divide between LPs on the value of ESG in operations, Apollo has maintained an ESG-focused team within its greater operational business. According to Apollo, despite the headlines that may suggest otherwise, the firm’s LPs want to see action on ESG. 

“Overall, LPs don’t all have the same demands or expectations on ESG. However, in aggregate the direction of travel with investor expectations on ESG has only been in one direction over the last several years,” Ben Saunders, a principal in sustainability for Apollo’s portfolio performance solutions business, explained. 

Saunders co-authored Apollo’s August 2024 white paper, “Building Better Businesses: How Apollo Equity Helps Drive Value Through Portfolio Company Decarbonization,” which laid out how the firm’s operational team leverages ESG to create concrete financial value.

According to Saunders, Apollo tracks ESG outreach from LPs on a quarterly basis. Year-over-year, LP outreach for Q2 of this year was 40% higher than outreach in Q2 2023. When compared to Apollo’s Q2 2022 figure, outreach was up over 130%, and when compared to its Q2 2021 figure, it was up over 200%.

And, according to Saunders, 95% of LP engagement last quarter was on climate. Apollo’s goals there include its $1.7 billion AUM impact platform and its $4 billion clean transition capital strategy. Additionally, the firm aims to invest $100 billion across asset classes by 2030 as a part of its sustainable investment platform. 

Nevertheless, Apollo does not impose science-based targets for every company in its portfolios. Rather, the decarbonization targets Apollo sets are more company-specific and set at a fund level. 

Apollo’s most recent flagship fund, for example, has a goal to decarbonize the portfolio by 15% on a median basis during its typical investment period. That is despite the United Nations stressing a need for global decarbonization to be reduced by 45% over a similar time frame (by 2030) in order to reach net zero by 2050. As such, Apollo has not made a net zero by 2050 pledge. 

Saunders argues that this allows the firm greater flexibility to seek concrete returns in relation to its ESG strategies – a “materiality-based” approach. 

Down to the portcos

This approach also gives Apollo the flexibility to include harder-to-abate assets in its portfolios, so long as the portfolios’ decarbonization median holds steady. 

“The decarbonization target alone does not have an impact on whether or not we invest in certain industries, which is, I think, part of what makes the goal a bold commitment and a commitment to rigorous decarbonization planning and action with these companies,” said Saunders.

“One of our focuses early in the investment period is usually getting the right cross-functional team members involved,” he continued. “Building that functional internal team that meets regularly and has defined ownership roles is really important. Process integration typically includes embedding ESG KPIs throughout the decision-making process for those stakeholders.”

But those KPIs have to be communicated intentionally to portco executives, Saunders stresses: “When you go speak to a CFO, you can't talk in the ESG, alphabet-soup jargon. You have to talk in terms of ROI and costs and benefits of initiatives.”

Through those conversations, Apollo has uncovered that the greatest difficulties for portcos in regard to sustainability at the end of 2022 were a lack of accurate data, unclear returns on investments for ESG initiatives, and a lack of budget to carry out decarbonization plans.

“If you don't have good data, then you can't build a business case for an initiative. And if you can't build a business case and prove the ROI, you can't get a budget. So a lot of our focus early in our engagement with companies is getting that data in place and building a business case for these initiatives,” Saunders explained. 

He concluded that to do truly impactful work at the portfolio level, data has to be at the center of the conversation.

“Integrating ESG data into financial and operational data, that's a big gap right now in the market for many companies: understanding how their operational decisions will impact KPIs like emissions reduction, for example, or a product’s carbon footprint,” he said.