The sustainability nonprofit Ceres and The SustainAbility Institute by ERM (the SustainAbility Institute) released a new report outlining solutions and recommendations to guide the private equity industry in addressing the systemic risk that climate change poses to the global economy. The report, The Changing Climate for Private Equity, assesses the state of private equity with regard to integration of climate issues in investment practices and provides valuable insights to help the industry realize the investment opportunities presented by the transition to a low carbon future.
The report’s findings were drawn from research which included interviews with 27 leading private equity General and Limited Partners. This includes 18 leading General Partners with over $1.9 trillion total AUM, including Apollo Global Management, Bain Capital, The Carlyle Group, EQT AB, KKR & Co. Inc, Partners Group, and TPG, as well as nine Limited Partners, including the California Public Employees Retirement System (CalPERS), Church of England Pensions Board, and OMERS, with a collective $1.3 trillion total AUM.
The report recommends the private equity industry prioritize the following to mitigate risk and fully realize the investment opportunity related to the transition to a net zero economy:
- Embed the 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.
- Enhance and accelerate the climate-related disclosure and transparency efforts of private equity firms and the companies in which they invest.
- Establish the business case required to make a public commitment to achieve portfolio-wide net zero emissions by 2040 or no later than 2050; ensure this includes setting science-based targets.
- Identify and capture value from investment opportunities relating to financing the low carbon economy transition, including increasing investment in companies that offer low-carbon solutions and technologies, and seizing opportunities to invest in presently high-emitting companies that can transform through defined decarbonization strategies that the firm can support.
- Promote greater industry alignment with, and uptake of, existing and emerging ESG, climate-related, and Paris-aligned frameworks as well as related guidance, net zero commitments, science-based targets, standardized data, metrics and tools.
“While the investment community increasingly understands that performance will be significantly impacted by climate risk’s systemic nature, private equity has a long road ahead for a disciplined and transparent climate integration as compared to 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. “Financial institutions have unparalleled influence and touch points across key sectors, and we hope private equity chooses to act upon the insights contained within this report and support the changes necessary to integrate climate considerations across their investment value chain.”
“Private equity’s consistently high performance has made it a draw for investors, and there is enormous potential for those that see the opportunity in repositioning portfolios toward sustainable solutions,” said Jaideep Das, Partner, Global M&A Services and Finance Sector Lead (EMEA), ERM. “Private equity is fully capable of addressing climate risks in its portfolios while meeting its fiduciary responsibilities. Importantly, climate change presents unprecedented business opportunities for the industry in addition to risks. 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.”
The report’s findings reflect what Ceres and the SustainAbility Institute have heard from some of the largest private equity asset owners and managers – that there is an urgency to act on climate within private equity, but that there is a clear need for direction, guidance, and peer engagement.
Interviewed General Partners and Limited Partners agree that future investment performance will be significantly impacted by climate risk. 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 decarbonization pathways, increasing investments in climate solutions, and setting ambitious climate goals.
To accelerate the pace of decarbonization and bring private equity into mainstream investor climate discussions, Ceres has established a working group for private equity managers and their Limited Partners. Ceres anticipates that private equity managers who follow the recommendations of this report will join other institutional investors in issuing Investor Climate Action Plans (ICAPs) and make credible net zero portfolio emissions commitments. As a founding partner of The Investor Agenda, Ceres recently helped develop and release the ICAPs Expectations Ladder and Guidance, a new framework that provides investors with clear expectations for issuing and implementing comprehensive climate action plans, wherever they may be on their climate journey, including steps they can take to support the goal of a net zero economy by 2050 or sooner. The new report will also lay the foundation for updating the Net Zero Investment Framework, launched by Ceres and investor networks from Asia, Australia and Europe, with private equity recommendations later this year.