Jane: [00:00:00] Hello and welcome to the LSEG Sustainable Growth podcast, where we talk to leading experts about sustainability and finance. I'm Jane Goodland, and this week we're talking to Sophie Flak from Eurazeo, which is a diversified investment manager with strategies across private equity, private debt, real estate and infrastructure. Sophie has more than 20 years’ experience in the field of sustainable and technological transformation and is now a member of the executive board and managing partner for ESG and digital. Now I'm really looking forward to finding out more about their approach to impact investing, and in particular, there use of the science based methodology using planetary boundaries. But before we get into the conversation with Sophie, a quick reminder to follow us so you don't miss any future episodes. And also, don't forget to rate us on Spotify, Apple Podcasts, or any other platform you use. So let’s hear from Sophie.
Jane: [00:00:55] Hi, Sophie. Thanks so much for joining us. How are you doing today?
Sophie: [00:00:59] I'm great Jane. It's lovely to be with you today.
Jane: [00:01:02] Well, we've got a lot to cover, so let's get started. So you're a diversified private markets asset manager. Tell us a bit more about the company.
Sophie: [00:01:09] Sure. So the company is named Eurazeo. We are a European asset manager. We manage roughly 35 billion of assets, something which is specific about our company is that 8 billion come from our own balance sheet. So that creates a very direct alignment of interest with our clients when we invest in a fund. We are diversified. So we operate in private equity, in debt and in real assets. Private equity is roughly 65% of the business, from venture to large cap, minority and majority. Then in that 30% and real assets split between real estate and sustainable infrastructure, 5%.
Jane: [00:01:56] And who are you investing on behalf of?
Sophie: [00:01:59] So we invest for our clients. So out of the 35 billion most of it is money from our LPS. Most of our LPS, I would say are in majority European, but we've grown very strong internationally. You know, originally the company was French. 100 years ago. And we've diversified it. And now we operate ten offices in ten countries worldwide. And we're really expanding on the international especially, you know, when you want to raise money. We have a lot of investors in Asia, in America and in Middle East who are very interested in diversifying their portfolio and their exposure to the European economy.
Jane: [00:02:42] Excellent. Okay. Now, I noticed that you guys look for investment opportunities exposed to structural growth drivers that deliver profitable impact. It's this kind of term profitable impact. Tell me more about that. What do you mean by that phrase?
Sophie: [00:02:57] So when you look at our strategy, our strategy is to be the European market, a European leader. Our strategy is to be the European leader for growth. So growing opportunities, growing assets, mid-market and impact. So I'm going now to focus on impact. To rewind a little bit. Eurazeo as well as the private equity market has encountered a fantastic growth thanks to tech over the last 10-15 years. Our very strong strategic belief is that impact is the next growth wave of our industry. And when we discuss impact, impact was born in the socially responsible economy, which was to put impact at first, social and environmental impact at first and discard financial profitability. And over the last ten years we've seen a new asset class growing, which is what we call profitable impact, meaning that the product, the financial product, be it in buyout, in debt or in real assets will deliver the exact same type of financial performance. And on top of it, it will deliver a quantitative, proven, extra financial impact, be it social or be it environmental. So that's really what we call profitable impact. So we are not anymore in the philanthropic world. We are not anymore in the first generation of impact first product. We are really in the new mainstream. And if you look at the market fundamentals, this market has been multiplied by ten since 2007. And now it's rough size is about $350 billion. So it has become a huge market and growing.
Jane: [00:04:49] And you've got a number of funds impact funds, haven't you? Tell us about those. What asset classes do they cover, etc..
Sophie: [00:04:57] So it's kind of a long story if you allow me. So Eurazeo has always put sustainability at the heart of the way we were doing business. So I know that many people claim themselves to be pioneers. In our case, I like to say it's true. The reason for it is, of course we are great, but not only. We're French and we're regulated and we are listed company. And as such, since 2009, we need to deliver extra financial reporting. So we were really, you know, driven into taking into account sustainability and the way we like to think about regulation. You know, you can complain about regulation, but you can also decide to make it a business advantage. So how do you transform a mandatory, sometimes burdening thing into how do I become more powerful? So that's how we implemented sustainability in the way we invest. First of all, to avoid risk. And if you look at our exclusion policy, each time I present our exclusion policy, it's not an ethic claim. It's not a philosophical vision. It's a shield against stranded assets. At Eurazeo, we have no stranded assets, meaning assets whose value would fall down because there would be a turn in the market, be it regulatory, be it consumer based. So that's the first thing. So we implemented that across all our investment team. And then we saw a growing number of interesting companies in which to invest. So today Eurazeo we finance 600 companies worldwide. And you know we get a lot of incoming calls. People saying, hey, look at this company.
Sophie: [00:06:40] It's interesting. And like many others, we started in venture. So investing in Start-Ups and we did a hybrid. So we have a fund which is called Smart City which finance tech for cities. And we decided half of it. Half of the second vintage is going to be the same, and the other half is going to be climate oriented. So this fund needs to deliver to invest in companies that will deliver a proven climate impact. And that's very important when I say proven. And that's where Eurazeo really differentiates from the competition. We do science based impact. So everything is measured. Everything is based on scientific methodology. And you know, in France we have Moliere and Moliere wrote this play, which is Le Bourgeois gentilhomme, you know, who wants to speak like nice people, you know, and he doesn't know how to do it. And so we have this French saying doing things like Monsieur Jourdain, meaning with your band's common sense, but not necessarily fits it. So at Eurazeo, sustainability and impact is not based on our best common sense, where we can see in many other big countries it's based on science. So it was born in venture, then we moved to sustainable infrastructure and we just closed our first fund, which is a real success, €750 million for a first-time fund. We onboarded a new team and it's super well deploying and we will get back to that if you want Jane, because that's another of our specificity. Of course we need to build profitable impact fund, but we need to build impact fund that do deploy.
Sophie: [00:08:36] And some of the competition is pretty cornered with two step product which do . So, you know, you have a lot of boat or port infrastructure that needs to decarbonise. So we have a fund that needs to decarbonise by 20%. So it's mostly leading, you know, and it's extremely, extremely efficient. And since we launched the fund the European regulation carbon tax kicked in for the maritime sector. So the fund is, you know, many beautiful growth. And we will launch the next the second vintage next year. And now we are opening a new era. So we are right now fundraising for buyout fund. And I would say buyout fund is a missing link. But it's understandable because companies were not ready. And now in Europe we see a very big number of small sized company yet profitable. So you're not in venture anymore, but they are small and we need to grow them through buy and build to make them European platform. So you have very few buyout fund in impact for the moment. And the second thing which is super important about this fund. This fund will not only address climates but of course it will express climate but will address the planetary boundaries so you know the nine planetary plan is defined by the Stockholm Resilience Centre which are the nine limits
Jane: [00:10:00] That fund sounds really interesting. And I want to ask a little bit more about the methodology, because I know that you've based it on the work of the Stockholm Resilience Centre with the Planetary Boundaries methodology. Tell us more about that, because it sounds fascinating.
Sophie: [00:10:15] Yes. So you see the first generation of impact and we've seen worldwide are pretty narrow. They tackle one topic. So it's going to be climate. It can be ocean, it can be water. But as science progresses we see that everything is intertwined. And as a matter of fact, what we're aiming at, you know, is protecting the biodiversity. And let me remind us all that human beings are part of biodiversity. So we're working with ourselves. So we decided to take the best available scientific framework, which is, as you said, the one from the Stockholm Resilience Centre, which is based on the nine Planetary boundaries. What are there? There are the nine geophysical schemes at work to keep our planet working nicely. Well, it was working nicely. We see more and more disruption. So within it you have climate, you have water, you have ocean acidification, you have biodiversity. I'm not going to list the nine. There is a lot of literature about it. What is super important is one of the limit is ozone depletion. And the reason why I like to talk about ozone depletion is that if you remember, 20 years ago, there was a big hole in the ozone layer. And thanks to innovation, science, regulation and change of consumer behaviour, we managed to reverse back. So what we want to do with our fund is identify solutions which will which allow us to revert back within the safe limit. And I would like to give you just one very cool example of a company we're looking at. You know that the water crisis is kicking in Europe.
Sophie: [00:13:01] So for example, having water in Rome or in Barcelona in the summer starts to be an issue. So we are building the water supply chain, you know, bringing in water through supertankers like it's being done in Singapore for years, but it's not enough. And if you look at all our pipes, Europe is an old lady, if I may say so. So our pipes are leaking and we are wasting in average 30% of water. And if you look in northern Europe, in Sweden and Norway, they have very cool solution. So instead of opening the soil and replacing the pipe, which creates a lot of difficulties with the cities and you know, the inhabitants, you can just send in liners and liners kill the leakage. So of course it's not magical. Some of those liners are chemical based and can create pollution transfer to water. Some others are not. So we've identified some of those companies, and we want to put them together to make the Europe to emerge, to create the European leader. And as you can see, there is a great market potential. And soon there will be also very cool, strong regulations that are going to support those trends. So this product is interesting because it's holistic from an environmental point of view, very large investment thesis. And since it's based in Europe, you know, in Europe we often see regulation as a burden, but it is also a key driver to build. Markets and regulations are ready and are building the market.
Jane: [00:13:45] I think it sounds like a really good methodology to build a holistic strategy on. I'm interested to see how you kind of take that scientific approach and then convert it into an investment strategy. So how do that conversion? How does that apply in the context of a portfolio management approach?
Sophie: [00:13:57] Well, you're asking the tricky question, Jane.
Jane: [00:13:59] That's my job.
Sophie: [00:14:01] I know it took us nearly two years of work with investment team, with economists, with lawyers to be able to transform the scientific framework into effective investment economic segments. So because, you know, when you say, okay, I want to fight water depletion or I want to restore water, where do I work? So we did some very economic driven work for each planetary boundaries to look, you know, how can we revert back, how can we mitigate, how can we adapt. This is also super important, you know, because a lot of funds are dedicated to building the transition. And as much as transition is important, if I'm being a bit blunt here, we need to adapt. I mean, we have to wait for the transition. So we need to adapt. And while adapting, let's try, you know, not to make things even more complicated from a transition standpoint. So you know we did it limit by limit to see what we can do. And then at the end of the day, we identify you know, that each time it was crossing meaning that either it was going to be technology which provide enablers. So for example, we are looking right now at vertical companies that do methane leakage measurements through satellite imagery.
Sophie: [00:15:29] There are very interesting companies in America and also in Europe. I'm being vague here, you know, because competitions stay away from it. So you have tech enablers. You have also a lot of service based companies. So, you know, the example I was giving about leakage, water leakage. Either you're going to have the companies that are going to make the liner. So, you know, it's a product, but you will also have the companies that are going to implement, and then you are going to have the companies that monitor. So each time you have a whole supply chain. So it's going to be a lot about investing into nature based products. So how do we restore nature. How do we avoid creating more harm. It's going to be about a lot, of course, about climate and all pollutions. And then it's going to be a lot about natural resources and waste. And, you know, as much as we are seeing a growing, lacking amount of natural resources, they are what we call the urban mind. And the urban minds are, you know, transforming waste into the circular economy. So nature, pollution, resources are going to be the three main segments to be invested into, and then either industry, manufacturer, service or tech.
Jane: [00:16:56] Sounds interesting so far. I'm interested in even more of the practicalities. So within that context you've set out, you've got the boundaries, you've got the focus areas, etc.. When you're looking at a prospective investment where do you get the data from? Because data is king, right? You know, if you need to be able to kind of be able to determine whether or not there's a real impact occurring and be able to monitor that over time, you need to really understand the specifics. And that's where the data comes in. So where do you get that data when you're looking at a prospective investment?
Sophie: [00:17:30] So again, it's a tricky question. First of all, it starts with having the right people in your team that understand where to look for the data and how to analyse it. And at Eurazeo, we have in our sustainability and impact team some agricultural engineers. I must say that I do have a sweet spot for this type of education because agricultural engineers can address climate, can address water, can address biodiversity, can address pollution. So they have, you know, a very large spectrum of knowledge. And of course, then we, we ask them to go deeper into their specialisation. And as a matter of fact, two of the agriculture engineers of the sustainability team of Eurazeo platform are transferring to the Planetary Boundaries Fund. So first of all, you need the right skill set, and then you need to make sure that investors are able to work with environmental engineers and vice versa. You know, it's not one on one side and the other. You need to create an integrated, yes, business plan and adaptation plan for the company. Then we work in two steps. We work when we are in due diligence. So analysing a potential target. And I will give you a real life example. First of all, yeah, first of all, we work with market data. So when we have a company coming in, you know, and we get a lot of incoming calls, we do what I call a web check, you know, a study check.
Sophie: [00:19:05] So it's really going to be the first phases. Do you want to go yes or no in this business. So real life example from another team just yesterday. You know, they are looking at inland fishing farms and is it okay, is it not okay? So at Eurazeo, we ban in sea fishing farms because they are destroying biodiversity, because they're sending too much chemicals, even if you call it medicine, it's still chemicals in the sea. It's very bad for biodiversity. So this one is okay. And then we said yes, but. So we're not going to harm biodiversity. Step one of verification. Step two. What type of medicine chemicals are they using and to what proportion? Because we do not want to harm human health. And the reason for it. Again, remember what I said about our exclusion policy being a shield against traded assets in Europe? Reregulate, you know, to the fullest extent. And we know that heavily chemicals in food could be banned. And when we invest, you know, we detain asset 5 to 7 years. We need to exit. And the people coming after us need to exit as well. So we usually try to forecast what good will look like in 15 to 20 years from now.
Sophie: [00:20:21] So scanning the web, looking at the studies, looking at the controversies, first step we say yes no. So that's a yes. Then we're going to dig deeper. And that's when we start discussing with the management accessing the data room. And then we can go into a greater level of detail. Again, let me give you another real life example. We are looking right now. So that's for the Planetary Boundaries Fund. We are looking right now at geothermal deep drilling. So when you say deep drilling, you know, everybody thinks, oh my God, oil and gas. But no, it's for geothermal and maybe tomorrow for water. So, you know, I love how we can reverse situations and take a fantastic skill set, you know, and transform it for the better good. So then we are in discussion with the management because geothermal is strong, there will be a very strong regulatory push in Europe because it has been sub invested and they are not so many controversies like for wind farm or solar farms, you know, where people find it ugly and then and then it becomes a nightmare to get your permit. But the issue is that it uses a lot of water sends in a lot of chemicals and use a lot of energy. So we had some very detailed discussion and field review with the management, which is piloting as we speak, green chemical to pollute the sludge.
Sophie: [00:21:49] We can go up to recycling more than 90% of the water we would be using in the process. And we are also looking at how to instead of using oil to use high voltage electricity and we need. So this works from an operational point of view from an impact point of view. You see that of course geothermal has a positive outcome, but the process will also be improved. So this is super important. But then it needs to work from a financial standpoint. So how much does it cost? Can we scale it? And then the team work together. And then we start to have a very strong financial business plan as well as, I would say, an impact plan. But again, the impact plan remains good estimates but still estimates. And once we acquire the company, then we take 12 to 18 months to do a life cycle analysis, full life cycle analysis. And that's very new. And that's where the science comes in. And it's based on the life cycle analysis. We will define the quantitative binding targets of the impact plan. That will then revert back to the career of the team, because 20 to 30% of the carrier of the team will be linked to achieving extra financial impact targets.
Jane: [00:23:23] Well, that certainly focuses minds, right?
Sophie: [00:23:25] I'm sorry. I'm being a bit technical.
Jane: [00:23:30] I think it's a really interesting point, though, in terms of the alignment of interests. So that actually the investment team is kind of really accountable for the delivery of that impact as well as the financial growth. I wanted to ask Sophie, just a final question, really, about time frames. And by the nature of your organisation, you are perhaps longer term than a kind of a typical kind of global equity manager, for example. I wanted to kind of understand a bit more about how your focus on impact and the long term nature of your investment really helped to add value over the long term.
Sophie: [00:24:14] So I would say we are no longer term than any other private equity asset manager versus listed. Of course, we don't operate in the same time frame, but they are very unusual time frame for private equity. We are pragmatists and strategist and before. So today, you know, in our 35 billion of assets under management, we manage a bit more than 5 billion of impact related investments. In the impact funds, we have two thirds of those 5 billion. The reason for it is that the other impact investment come from our other big funds, you know which are non-impact. And we saw okay our growth fund has invested heavily in circular economy and you know Skyrocketing. Oh, and our mid and large buyout has done a great deal. And you know and then we saw okay there is a market. There is an opportunity. There is a profitability let's start building impact funds. So that's how we moved there. You know that's how we came to this conclusion that it is becoming the growth wave of our industry. So how does it add value? I believe that it's going to add value on two aspects. Well, on three aspects, first of all, of course it's going to generate financial value to our customers and to our shareholders. So as any usual product, I also believe, that's the nature of an impact fund. It's going to deliver value from an impact point of view, be it environmental or social, because we operate a lot in health also. And that's more important, our risk profile is going to be very, very much differentiated because what people need to understand, you know, is that we've been talking about climate change since the 60s, you know, and it has been lasting a long time.
Sophie: [00:26:19] But the problem is, you know, when you talk with people and you say, what is your carbon budget yearly? They don't know, if you say, what is your yearly income. They all know. You ask a CEO what is your carbon footprint or water footprint? No clue at all. Not Eurazeo, they have a clue. And of course they are great. If you ask what are the revenues, the profitability, everybody know and why. Because it's kind of intangible. So what has changed since 2015-16 is that the physical world has started to kick in the economy. What do I mean by physical world? You start to have physical disruptions. You know, some resources are no longer available. You can't buy them or price, you know, are doing like that. We operate in food, so we see that a lot. We have a few assets which we are very diversified, you know, to face the risk. So you have storms, you have droughts, you have. So when the physical world kicks in, it becomes a different story, not only to protect your assets, but the stranded assets are going to become wider, wider, wider, wider. So what are we doing? Impact, in my view, will become mainstream because we are financing the adaptation, we are financing the transition and probably in the next 10 to 20 years from now, it will be what there is to be, you know, and probably that an older form of the economy. Will slow down, slow down, slow down, slow down. And a new type of economy will take over and will become mainstream. So risk will be managed. Value will be great.
Jane: [00:28:04] Well, I think that's probably a perfect place to stop the conversation today, but we could have gone on for a long time. But it's really interesting to see how a scientific methodology translates into a real world investment strategy. So thank you so much for sharing your experience, your expertise, and also some of those examples. But thank you very much indeed, Sophie.
Sophie: [00:28:25] Thank you so much.
Jane: [00:28:36] So that's it for this episode of the Sustainable Growth Podcast. I hope you enjoyed that conversation with Sophie. If you've got questions, comments, or someone you'd want us to talk to, then do get in touch by email at fmt@lseg.com. That's all from me but watch out for the next episode very soon.
