Net Zero for Private Equity: action at portfolio level
PEI’s Responsible Investment Forum Europe 2021 brought together over 300 fund managers, institutional investors and expert advisors to discuss ESG issues across alternative asset classes. Matt Cvijan and Philip Mitchell from Carbon Intelligence opened the second day with a keynote address explaining the route to net zero across a GP’s portfolio. Here’s what they covered.
Net Zero by 2050 – why is this a GP problem?
Financial institutions are under increasing pressure to commit to net zero targets and really understand their portfolio emissions. Finance day at COP26 highlighted the importance of the sector in transforming the economy towards a net zero future in tandem with government action, which alone simply isn’t enough to drive the change.
The total operational emissions of a private equity firm could be in excess of 10,000 tCO2 pa, contributing to 90m tonnes of CO2 for the industry globally. That roughly equates to the carbon emissions of Belgium so the potential impact is huge. Private equity will play a key role in helping businesses transition and can add real value in driving these conversations. Investors can be instrumental in driving positive change across their portfolio by helping portfolio companies understand what net zero means for them.
Despite the recognised importance of GPs in supporting this shift to net zero, it is still evident that current efforts are inefficient. So far there are only seven Private Equity firms that have had SBTi approved plans and five more that have committed. This is in comparison to 2,006 companies that have committed to an SBT globally across all sectors and over 8,800 Private Equity firms that could do so. A large number of these 8,800 firms have signed up to the PRI and made bold claims to be more committed to ESG but in reality there are very few who are ingraining it within their investment processes.
Tailoring to your portfolio company needs
GPs are in a unique position to not only provide financial support to their companies but also apply their own ESG principles and net zero targets to share insight, expertise and connections. ESG is a really important way for GPs to add value to portfolio companies moving forward and there is a clear appetite for investment in net zero. On the flip side, there are significant benefits at the GP level of being more ESG-aware:
- Cheaper debt provision for green-linked investments
- Higher demand from investors for sustainable investments
- Better exit valuations
- A better understanding of their portfolio companies
Your portfolio will present varying levels of maturity when it comes to adopting net zero and will require a tailored approach to drive meaningful carbon reductions. Ultimately, as a GP, your interests are aligned as both parties will be seeking to maximise value and impact in order to build businesses that are resilient to the net zero transition. Some companies will be independent while others will require nurturing. Another factor to consider is the gradual introduction and clarification of sector-specific pathways because every company and sector faces its own nuances and challenges.
Where to start? Practical tips for a decarbonisation roadmap
We understand that it can be daunting to take the plunge and there are uncertainties surrounding data quality or availability. But as data improves, GPs can reduce reliance on estimates which in turn generates better decisions. So whether you have some data or even no data, the best thing you can do is just get started. It is important for GPs to get a handle on their largest emitters and think about the size and maturity of their companies.
Whilst there is not a one size fits all solution to achieve net zero, a private equity firm will need to apply a tailored approach that reflects the diverse nature of it’s portfolios. However the key is to make a start.
Carbon Intelligence is the UK’s leading science-based target consultancy and data business. Get in touch today if you would like to learn more about how to set and execute the right net zero target for your firm and what it means for your different portfolio companies.