Nothing screams "climate emergency" quite like seeing smoke billowing down your street—in 104-degree heat—as three wildfires rage within a mile or so of your home. That was the sight outside my window on Tuesday night. I don't live in Australia or California, I live just outside London.

The average summer temperature in London is typically around the low-70s; wildfires are practically unheard of. It's not just the UK that's suffered. This week, we saw an unprecedented heat wave engulf the whole of Europe, with fires unleashing even greater devastation in France and Spain. Inevitably, my thoughts are drawn to the private markets industry and how it could help to mitigate the impact of human-induced global warming.

Private markets have a significant role to play in addressing the crisis. According to PitchBook's Q1 2022 Global Private Fund Strategies Report, fund managers have around $3.2 trillion in dry powder at their disposal and $9.9 trillion in overall AUM. As such, the industry has its hands on many of the economic levers needed to tackle climate change.

There are glimmers of hope. Investment in climate change-related sectors has been on the rise, though time is also limited. If sufficient action isn't taken, NASA predicts that by the end of the century, temperatures could rise to a point that would make some currently populated parts of the planet uninhabitable. But, given investors' so far inadequate response to the climate emergency, one wonders if private markets are up to the job.

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Until now, the industry has almost exclusively looked at climate change through the lens of environmental, social and governance (ESG) investing, a term that first came into use in the mid-2000s with the UN Principles for Responsible Investment. Many point to the mainstreaming of ESG as evidence of progress. A recent report from PWC points out that in Europe alone private market ESG assets are expected to grow from today's €775.7 billion to €1.2 trillion by 2025.

But while well-intended, ESG is far from a panacea. At best, there have been doubts about the efficacy of using the "E" in ESG as a means of reducing carbon emissions and mitigating climate change. At worst, it is a fig leaf for an industry that is not yet serious about its environmental responsibilities. A big issue is that there is no one standardized way to measure ESG success. A popular mantra is "doing well by doing good," but there is no consensus on what either of those things look like, or whether ESG compliance translates into good outcomes, or even good returns.

Some critics go further. Last year, BlackRock's former CIO for sustainable investing, Tariq Fancy, published an essay highlighting issues such as greenwashing. He argued that ESG is not just vague, but actively destructive.

Data also suggests that pledges to divest are simply not enough. While individual fund managers have disavowed investing in assets responsible for high levels of greenhouse gas emissions, a large part of the market is still willing to hold those assets. PitchBook data, cited in a report on private markets and sustainability by the World Economic Forum and the Boston Consulting Group, shows that of $1.1 trillion invested in the energy sector by private equity since 2010, more than 80% went directly into fossil fuels.

This is happening even now. Our Q1 2022 US PE Breakdown revealed that PE investment in oil and gas deals actually recovered during the first three months of the year, as GPs saw market volatility and rising energy prices as an opportunity for dealmaking. And while there is a need to stop capital from flowing into harmful areas, more also needs to flow into areas with a positive impact.

Meaningfully tackling climate change will require a profound increase in investment. Estimates run anywhere between $300 billion and $50 trillion over the next 20 years—in either scenario, a lot of capital needs to be mobilized. But the cost of doing nothing is greater: According to Deloitte's Global Turning Point report, unchecked climate change could cost the global economy $178 trillion over the next 50 years.

There are some reasons for hope. There are two main areas where private markets have been more proactive about investing capital into fighting climate change: renewable energy infrastructure and climate tech innovation. PitchBook data shows that last year Europe's renewable energy sector saw a record 189 PE deals worth around €12.8 billion. And in June, BlackRock announced plans for a new fund strategy focusing on renewable energy infrastructure.

Meanwhile, climate tech startups had a strong start to the year and could draw sustained interest as the ongoing energy crisis spurs investment in green technologies including liquefied natural gas, nuclear energy, and solar, wind, and hydrogen power.

PitchBook data also shows significant progress on the innovation front too. Not only was 2021 a standout year for global climate tech investment, but startups in this space have also continued to raise money in 2022, with $13.7 billion of VC investment across 369 deals as of early June.

Nevertheless, private markets are in need of their own wake-up call. The industry cannot act alone. The world is at a critical point that demands a rapid response from all stakeholders, regulators and policymakers. While there is a very real danger of failure, there is also every chance of success.

Of course, private markets will always look at responsible investing through the lens of risk management and opportunities for better returns. Indeed, action on climate change can create opportunities for future value creation. But more importantly, it will prevent the kind of environmental collapse that will ultimately destroy value—now and in the future.

In that respect, tackling the crisis at our window is not only a financial imperative, but it's also an existential one.

Featured image by Drew Sanders/PitchBook News

This article originally appeared on PitchBook News