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Investors and private equity (PE) firms have a pivotal role to play in the fight against climate change. The way in which these financial players select, manage, and influence their portfolio companies can have profound implications for our planet\u2019s health. And it doesn\u2019t stop there. By focusing on climate change investment, ESG, and climate action across all their portfolio companies, investors can also unlock significant economic advantages and drive growth. In this article, we round up the most relevant insights and resources on private equity trends in sustainability and climate change investment.<\/p>\n\n\n\n
\u201cThe IPCC\u2019s Sixth Assessment Report (AR6) underscored the urgency for financial sector action with its finding that finance for mitigation must be three to six times higher by 2030 to limit warming to below 2\u00b0C.\u201d <\/p>\n\n\n\n
–Science Based Targets initiative<\/a> (SBTi)<\/p>\n<\/div><\/div>\n\n\n\n Download the 7 Benefits of Carbon Credits: How to Make the Business Case to the C-Suite<\/a> to learn about how carbon credits can help you and your portfolio companies drive positive impact and business value.<\/strong><\/em><\/p>\n\n\n\n Financed emissions are the greenhouse gas (GHG) emissions from all the companies in a private equity firm\u2019s portfolio, proportioned by how much of those companies\u2019 activities are financed by the PE firm. These GHG emissions are considered to be the indirect carbon footprint of the PE firm. (Pathzero<\/a>, PwC<\/a>)<\/p>\n\n\n\n \u201cFinanced emissions are more than 700 times higher on average than a financial institution\u2019s direct emissions.\u201d <\/p>\n\n\n\n –Carbon Disclosure Project<\/a> (CDP)<\/p>\n<\/div><\/div>\n\n\n\n How a company embeds ESG and climate action into its operations is increasingly affecting its financial performance and value<\/a>. PE firms recognize this and look for opportunities to invest in sustainable businesses or look for companies that they can transform into being more sustainable to drive value growth.<\/p>\n\n\n\n \u201cESG considerations are being taken into account much earlier in deal making processes, with a clear eye to value creation from the outset. Making a \u2018brown\u2019 company \u2018green\u2019 makes it more valuable on exit and increases the return on investment.\u201d <\/p>\n\n\n\n –Glenn Mincey<\/a>, Global and US Head of Private Equity at KPMG<\/p>\n<\/div><\/div>\n\n\n\n \u201cThe fact that half of all private equity investors think ESG investing will in itself boost their portfolio returns should be a wake-up call to anyone who still thinks ESG is a ‘nice to have’ or a PR tool.\u201d <\/p>\n\n\n\n –Jeremy Coller<\/a>, CIO of Coller Capital<\/p>\n<\/div><\/div>\n\n\n\n \u201cIn five years, I anticipate that ESG will firmly be part of a company\u2019s equity story. The ESG and climate equity story will be so embedded as a critical part of a company\u2019s competitiveness and value proposition that it will no longer be a separate ask.\u201d <\/p>\n\n\n\n –Glenn Mincey<\/a>, Global and US Head of Private Equity at KPMG <\/p>\n<\/div><\/div>\n\n\n\n Regulations around ESG and climate disclosure for companies and financial organizations are on the rise. It\u2019s critical for PE firms to stay ahead of this quickly changing landscape to avoid penalties for non-compliance, and to take advantage of incentives that could help transform portfolio companies into more sustainable businesses.<\/p>\n\n\n\n Climate change and reputational risk around ESG claims are becoming de facto business risks that most industries need to account for in their operational planning. It follows that PE firms need to consider these risks during all phases of the investment cycle.<\/p>\n\n\n\n \u201cWe know that climate risk is investment risk. But we also believe the climate transition presents a historic investment opportunity.\u201d <\/p>\n\n\n\n –Larry Fink<\/a>, Chairman and CEO of BlackRock <\/p>\n<\/div><\/div>\n\n\n\n Scope 3, or the GHG emissions that occur in the value chain of an organization, are usually the largest source of a company\u2019s emissions \u2013 accounting for more than 70%<\/a> of total emissions in many cases. PE firms and their portfolio companies will not be able to achieve meaningful ESG targets without addressing Scope 3<\/a>. Depending on the business, this will not be possible without the use of carbon removals<\/a>. Companies that have high unavoidable emissions are starting to plan now for how they will address them over the next ten years.<\/p>\n\n\n\n The UN Intergovernmental Panel on Climate Change (IPCC) said in its April 2022 report on mitigating climate change: \u201cThe deployment of carbon dioxide removals to counterbalance hard-to-abate residual emissions is unavoidable if net zero\u2026emissions are to be achieved.\u201d <\/p>\n\n\n\n -(McKinsey<\/a>)<\/p>\n<\/div><\/div>\n\n\n\n Decarbonization is key for portfolio companies to become more sustainable, and therefore more valuable. However, carbon credits should also be an integral part of any holistic sustainability strategy, particularly for hard-to-abate residual emissions. And as the climate crisis continues to heat up, it\u2019s likely that carbon negative companies, or those that go beyond net zero, will be the ones driving the most value in the future. Carbon credits provide an effective path for portfolio companies to achieve this status.<\/p>\n\n\n\n \u201cMany private equity investors avoid \u2018grey\u2019 or high-emitting assets in an attempt to decarbonize their portfolios. This is a missed opportunity. We cannot divest our way to global Net Zero. Meeting the world\u2019s decarbonization challenge requires investment and engagement. Private equity\u2014with its ability support strategic transformations and a longer horizon than public markets\u2014is ideally positioned to meet this need, transforming high-emitting assets \u201cfrom grey to green\u201d and making real progress towards our global ambition.\u201d <\/p>\n\n\n\n –Greg Fischer<\/a>, Partner and Director at BCG<\/p>\n<\/div><\/div>\n\n\n\n \u201cThe ESG value story today is more than whether the right policies and procedures are in place, it\u2019s about how ESG is embedded in the way the company does business and communicating the way it adds to or preserves the value of the business. A common area for enhancement is improving the alignment of ESG with, and as an enabler of, their broader business strategy.\u201d <\/p>\n\n\n\n –Tania Carnegie<\/a>, Global and US ESG Lead, Private Equity and Asset Management at KPMG<\/p>\n<\/div><\/div>\n\n\n\n PE firms are increasingly integrating ESG and climate action measures into their investment strategies. These firms, once primarily driven by bottom-line returns, now recognize the importance of sustainable practices for driving future growth. By decarbonizing their portfolio companies, they position themselves for long-term growth in an era marked by environmental challenges and evolving stakeholder expectations. <\/p>\n\n\n\n To achieve this value, many PE firms are beginning to set specific emissions reduction targets for their portfolio companies during the investment hold period. Depending on the business, achieving those goals will likely not be possible without the use of carbon removals. Leveraging high-quality carbon credits to achieve decarbonization goals quickly is an effective and complementary approach for moving portfolio companies to more sustainable practices. Examples include offsetting company events and corporate travel. <\/p>\n\n\n\n Carbon credits can also provide a path to innovation and additional value creation for portfolio companies. For example, Cloverly customer Redwood Logistics<\/a>, a portfolio company of AEA Investors, created a new offering where their customers can measure and offset their emissions related to shipments. Another example is banks that are offering customers the option to offset emissions related to their credit card transactions. And a global hospitality chain is offering travelers the ability to make climate contributions to help offset their trip.<\/p>\n\n\n\n On a global scale, the rate of carbon removal is falling short of what is needed to meet the goals of the Paris Agreement. To make true progress on addressing climate change, companies must invest in impactful carbon removal alongside decarbonization. However, many PE firms and portfolio companies lack the expertise on when and how to incorporate climate action into their ESG strategy. The voluntary carbon market (VCM) is complex and can be challenging to navigate. With Cloverly as a trusted partner, PE firms and their portfolio companies can gain the education and intelligence needed to effectively engage in the VCM, de-risk their investment, and strategically embed positive climate contributions into their business. Cloverly provides vetted selections of high-quality credits in our Marketplace<\/a> that are backed by our in-house climate expertise and three independent ratings agencies. Scaling climate action through Cloverly empowers PE firms to take immediate steps toward their own climate goals while also powering their portfolio companies to take action.<\/p>\n\n\n\n To learn more about how you can leverage carbon credits to drive business value for your portfolio companies, download the white paper: 7 Benefits of Carbon Credits: How to Make the Business Case<\/a><\/p>\n\n\n\n You may also be interested in reading the Ultimate Guide to Building a Carbon Credit Portfolio<\/a> to see how to include high-quality carbon removal credits in your climate action portfolio.<\/p>\n\n\n\n About the author:<\/p>\n\n\n\n Julie Yamamoto<\/a> is the Senior Content Manager at Cloverly. She has over 20 years of global experience spanning multiple sectors. Her work has been featured in several enterprise and nonprofit digital channels, as well as Forbes, TechTarget, GreenBiz, and American Forests. In previous roles, she led content marketing for the OneTrust ESG & Sustainability Cloud and the IBM Center for Applied Insights. She is also a trained Climate Reality leader and has led sustainability initiatives such as IBM AI for Social Good (Environment), Watson Green Advisor, Forests for the Earth, and conservation data science. She has a Master of Science in Marketing Management from Nanzan University and a Bachelor’s in Business Administration from Oglethorpe University.<\/p>\n\n\n","protected":false},"excerpt":{"rendered":" Investors and private equity (PE) firms have a pivotal role to play in the fight against climate change. The way in which these financial players select, manage, and influence their portfolio companies can have profound implications for our planet\u2019s health. And it doesn\u2019t stop there. By focusing on climate change investment, ESG, and climate action […]<\/p>\n","protected":false},"author":4,"featured_media":1336,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"qubely_global_settings":"","qubely_interactions":"","tpgb_global_settings":"","_coblocks_attr":"","_coblocks_dimensions":"","_coblocks_responsive_height":"","_coblocks_accordion_ie_support":"","content-type":"","_genesis_hide_title":false,"_genesis_hide_breadcrumbs":false,"_genesis_hide_singular_image":false,"_genesis_hide_footer_widgets":false,"_genesis_custom_body_class":"","_genesis_custom_post_class":"","_genesis_layout":"content-sidebar","footnotes":""},"categories":[4],"tags":[31,35,61],"ppma_author":[69],"qubely_featured_image_url":{"full":["https:\/\/cloverly.com\/wp-content\/uploads\/2023\/08\/private-equity-esg.png",600,338,false],"landscape":["https:\/\/cloverly.com\/wp-content\/uploads\/2023\/08\/private-equity-esg-1200x750.png",1200,750,true],"portraits":["https:\/\/cloverly.com\/wp-content\/uploads\/2023\/08\/private-equity-esg-540x320.png",540,320,true],"thumbnail":["https:\/\/cloverly.com\/wp-content\/uploads\/2023\/08\/private-equity-esg-150x150.png",150,150,true],"medium":["https:\/\/cloverly.com\/wp-content\/uploads\/2023\/08\/private-equity-esg-300x169.png",300,169,true],"medium_large":["https:\/\/cloverly.com\/wp-content\/uploads\/2023\/08\/private-equity-esg.png",600,338,false],"large":["https:\/\/cloverly.com\/wp-content\/uploads\/2023\/08\/private-equity-esg.png",600,338,false],"1536x1536":["https:\/\/cloverly.com\/wp-content\/uploads\/2023\/08\/private-equity-esg.png",600,338,false],"2048x2048":["https:\/\/cloverly.com\/wp-content\/uploads\/2023\/08\/private-equity-esg.png",600,338,false],"featured-blog":["https:\/\/cloverly.com\/wp-content\/uploads\/2023\/08\/private-equity-esg-600x338.png",600,338,true],"sidebar-thumbnail":["https:\/\/cloverly.com\/wp-content\/uploads\/2023\/08\/private-equity-esg-80x80.png",80,80,true],"qubely_landscape":["https:\/\/cloverly.com\/wp-content\/uploads\/2023\/08\/private-equity-esg-1200x750.png",1200,750,true],"qubely_portrait":["https:\/\/cloverly.com\/wp-content\/uploads\/2023\/08\/private-equity-esg-540x320.png",540,320,true],"qubely_thumbnail":["https:\/\/cloverly.com\/wp-content\/uploads\/2023\/08\/private-equity-esg-140x100.png",140,100,true],"gb-block-post-grid-landscape":["https:\/\/cloverly.com\/wp-content\/uploads\/2023\/08\/private-equity-esg-600x400.png",600,400,true],"gb-block-post-grid-square":["https:\/\/cloverly.com\/wp-content\/uploads\/2023\/08\/private-equity-esg-600x600.png",600,600,true],"tp-image-grid":["https:\/\/cloverly.com\/wp-content\/uploads\/2023\/08\/private-equity-esg-700x700.png",700,700,true],"yarpp-thumbnail":["https:\/\/cloverly.com\/wp-content\/uploads\/2023\/08\/private-equity-esg-120x120.png",120,120,true]},"qubely_author":{"display_name":"Julie Yamamoto","author_link":"https:\/\/cloverly.com\/author\/julie-yamamoto\/"},"qubely_comment":0,"qubely_category":"Blog<\/a>","qubely_excerpt":"Investors and private equity (PE) firms have a pivotal role to play in the fight against climate change. The way in which these financial players select, manage, and influence their portfolio companies can have profound implications for our planet\u2019s health. And it doesn\u2019t stop there. By focusing on climate change investment, ESG, and climate action…","yoast_head":"\nWhat are financed emissions?<\/strong><\/h3>\n\n\n\n
Climate change investment and private equity ESG valuation trends<\/strong><\/h3>\n\n\n\n
(Coller Capital Summer 2022<\/a>)<\/strong><\/h4>\n\n\n\n
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(PwC 2023<\/a>)<\/strong><\/h4>\n\n\n\n
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(McKinsey 2023<\/a>)<\/strong><\/h4>\n\n\n\n
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(Coller Capital Summer 2021<\/a>)<\/strong><\/h4>\n\n\n\n
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(Multiple)<\/strong><\/h4>\n\n\n\n
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(HBR 2022<\/a>, INSEAD 2020<\/a>)<\/strong><\/h4>\n\n\n\n
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(PwC, 2022 landing page<\/a> and report<\/a>)<\/strong><\/h4>\n\n\n\n
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Regulatory trends affecting private equity: ESG and climate disclosure<\/strong><\/h3>\n\n\n\n
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Private equity ESG and climate risk trends <\/strong> <\/h3>\n\n\n\n
Climate risk<\/strong><\/h4>\n\n\n\n
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Reputational risk (PwC 2022<\/a>)<\/strong><\/h4>\n\n\n\n
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Private equity Scope 3 and climate pledge trends<\/strong> <\/h3>\n\n\n\n
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Applying ESG and climate action to portfolio companies<\/strong> <\/h3>\n\n\n\n
(PwC 2023<\/a>)<\/strong><\/h4>\n\n\n\n
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(LGT Capital Partners 2022<\/a> and 2023<\/a>)<\/strong><\/h4>\n\n\n\n
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(Multiple)<\/strong><\/h4>\n\n\n\n
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(HBR 2022<\/a>, INSEAD 2020<\/a>)<\/strong><\/h4>\n\n\n\n
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Private equity ESG: from bottom line to sustainable growth <\/strong><\/h3>\n\n\n\n
How Cloverly can help <\/strong><\/h3>\n\n\n\n
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