While conventional asset managers increasingly understand that performance will be significantly affected by climate risk’s systemic nature, private equity seems to lag behind in adopting disciplined and transparent climate integration compared with listed markets.
“For a successful transition to a net zero emissions future, however, private equity will have to be brought into mainstream climate discussions,” said Dazzle Bhujwala, director, Ceres Investor Network.
Findings from the report by non-profit Ceres and the SustainAbility Institute by ERM include recommendations on how to alleviate risk and realise investment opportunities related to climate issues.
Five-step programme
First, embed consideration of climate-related risks and opportunities into the policies and practices that guide private equity firms’ own governance, due diligence, risk management, and engagement of portfolio companies.
Second, enhance and accelerate climate-related disclosure and transparency efforts within firms and the companies in which they invest.
Third, establish the business case required to commit to achieve net zero emissions by 2040 or no later than 2050 and ensure this includes setting science-based targets.
Fourth, identify and capture value from investment opportunities relating to financing the net zero economy transition, including opportunities to invest in high-emitting companies that can transform through a defined decarbonisation strategy and by increasing investment in a range of climate-friendly companies and low carbon solutions and technologies.
Finally, promote greater industry alignment, including development and implementation of relevant ESG and climate climate-related frameworks, guidance, science-based targets, standardised data, metrics and tools.
The findings of the report, “The Changing Climate for Private Equity”, were drawn from interviews with 27 leading private equity firms.
These include Apollo Global Management, Bain Capital, The Carlyle Group, EQT AB, KKR, Partners Group, and TPG, as well as the California Public Employees Retirement System, Church of England Pensions Board, and OMERS.
Special pleading
Interviewees suggested that the dynamic nature of private equity investment (with shorter investment cycles than many other asset classes), inconsistent data, the lack of a single disclosure framework or net zero standard, and the challenges of building internal buy-in have been obstacles to progress to date.
Emerging best practices mentioned by interviewed firms that will help accelerate progress on climate integration in the future include regular engagement of boards on climate issues, building in-house expertise, improving transparency and disclosure, engagement of portfolio companies (especially heavy emitters) on decarbonisation pathways, increasing investments in climate solutions, and setting ambitious climate goals.
“Private equity is fully capable of addressing climate risks in its portfolios while meeting its fiduciary responsibilities,” said Jaideep Das, partner, global M&A services and finance sector lead (EMEA), ERM.
“Private equity is poised to play a pivotal role in shaping a net-zero emissions future; to do so, it must impose meaningful climate performance expectations on the companies in which it invests,” Das added.
Ceres is a non-profit organization working with capital market leaders to solve sustainability challenges. ERM advises companies how to transform business models to support the low carbon economy transition, and its SustainAbility Institute provides research.
