Private Equity Guide to measuring and addressing financed emissions

As a private equity firm, you play a crucial role in the transition to a green economy. But you have to start by effectively addressing your financed emissions. Here's how.

Author: Marie-Anne VincentVP Strategy & Regulatory
Reviewers: Elodie BroadHead of Impact and ESG; Marie EkelandFounder
Category: Guide
Topics: Finance
Published: 09 May 2023

Contents

Introduction

In this guide you will learn:

how to select the right framework for measurement
how to gather carbon data from across your portfolio
how to set collaborative climate targets
how to ensure you're meeting the latest sustainability regulations in finance.

Introduction

Private equity is evolving. Over the past decade, deal activity and size have both increased significantly, largely due to the low-interest rate environment and increased valuation multiples. We’ve also seen a considerable rise in new private equity firms, particularly those focussed on niche industries and geographies.

This growth across the sector has led to increased regulator and investor scrutiny, coupled with a demand for greater transparency and accountability.

We’ve also seen an increased focus on environmental, social, and governance (ESG) issues, with many private equity firms integrating ESG considerations into their investment decision-making processes. In fact, according to Atomico’s recent State of European Tech Report, 35% LPs chose not to commit to a GP relationship primarly due to ESG concerns.

Europe’s push on purpose-driven investment has increased over the past 18 months (while it has decreased in the US and Asia), and it now represents $54B cumulated investments since 2018 – highlighting that it’s a key growth factor in this part of the world.

This is great progress, but it’s just the beginning of the journey. As a private equity firm, you have a crucial role to play in driving the transition to a green economy. But, crucially, you shouldn’t act in a vacuum and you can’t simply focus on your own carbon footprint.

With great power comes great responsibility

At Sweep, we believe that private equity has a key role to play in global decarbonization for three reasons:

Capacity to invest

In 2021 the PE industry had $6.3 trillion in assets under management. Those assets are projected to exceed $11 trillion by 2026. We believe that the amount of investment needed to finance the climate transition can be funded from this sum.

Private equity-owned companies operate on a longer time horizon compared to the listed markets. The average holding period for portfolio companies has increased from about two years in the industry’s early days to about five years today. This means that it's high time to acknowledge that climate risk is a financial risk.

It’s also important to note that most of the pre-acquisition due diligence processes now include an assessment of the company’s resilience to climate change, both in terms of physical and transition risks.

Capacity to innovate

To achieve net zero emissions by 2050, the world needs to shift towards a low carbon economy. We need to be creative by inventing and financing new solutions, new technologies and new business models, and the private market is better placed than listed markets to support this innovation.

Capacity to influence

Compared to listed assets, private equity is known for its control model of ownership. Through the considerable influence they can leverage over portfolio companies, private equity firms can play a crucial engagement role in getting companies to accurately account for and manage their emissions, adopt decarbonization strategies, and more generally increase their focus on climate action – this can help differentiate companies’ operating models and build enterprise value.

But importantly, influence should be structurally placed at the board level. Investors should put climate performance KPIs as part of the board’s scope. In section 3 of this guide, we’ll discuss targets. It’s important that these are set at each portfolio company’s board and not just at the investors’ level. It’s only then that they’ll have a fair chance of being met.

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