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Net Zero for Private Equity: Why the time to act is now

By Helen Bradley
2nd December 2022

PEI’s Responsible Investment Forum Europe 2022 on 16 November 2022 brought together over 450  fund managers, institutional investors, and expert advisors to discuss ESG issues across alternative asset classes. Themes this year included climate, the role of ESG in value creation, and impact investment. 

Our experts Matt Cvijan and Vanessa Sheehan presented on day one of the event on the theme of ‘’Reconciling Decarbonisation with Growth’’.  In this first of two insights we share the case they made for taking action on decarbonisation and net zero alignment now. 

ESG disclosures across the sector are starting to surface, the call for action is growing louder and the cost of inaction is becoming clearer. 

During the PEI conference, The Initiative Climat International (iCI) published A Case for Net Zero in Private Equity  with an urgent call for GPs to support the alignment of the sector to a net-zero future. 

Similarly, on the 24 November 2022, the UN-convened Net-Zero Asset Owner Alliance (NZAOA)  published A Call to Action to Private Market Asset Managers, making clear their expectations and recommendations for addressing climate risk including the need for comprehensive financed Scope 1 and 2 GHG emissions by financial year 2023, and relevant and material Scope 3 emissions of underlying companies by 2024.

Research published in this years’ Investec GP Trends Report published in showed that:

  •  54% of respondents believe that ESG credentials will somewhat influence LP likelihood to commit capital to a fund
  • GPs expect portfolio companies that have good ESG processes in place to price at premiums of 10% or more when exited.
  • GPs are also increasingly wary of the value destructive potential of ESG risk, with 62% saying ESG has been a significant contributing factor to their decision not to invest in a company.

Having high expectations of asset managers in their approach to net zero is important to accelerating their push for real economy decarbonisation and their role in mitigating the systemic risk of climate change. However, the data gap remains a key barrier. Accurate, measured data is fundamental to the asset management community’s ability to raise their climate ambitions, given the huge reputational risks they face of not realising target commitments.  

On 22 November 2022 the FCA announced the formation of a group to develop a Code of Conduct for Environmental Social and Governance (ESG) data and ratings providers. The group will aim to meet for the first time later this year.  In the interim,  the broader industry, including data providers will need to work together to improve tools, metrics and standardised methodologies to encourage a better bottom-up flow of meaningful disclosures.

How we can help

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 its portfolios. However the key is to make a start. Carbon Intelligence, part of Accenture, is one of the UK’s leading science-based target consultancies and carbon data businesses. Get in touch today if you would like to learn more about how to set and execute a credible net zero target for your firm and what this means for your portfolio companies. Email [email protected]

Read next: Net Zero for Private Equity: Best practice for portfolio decarbonisation and value-creation