KPMG has helped investor groups, IIGCC and PRI, prepare Guide on Climate Change for Private Equity Investors. Research carried out for the guide found that pension funds are actively asking their fund managers to demonstrate how climate related risks and opportunities are addressed in the investment process.
As a result of this demand and increasing climate regulation, climate change is a mainstream discussion point for the private equity industry, where climate change is seen as a genuine material investment risk. It is no longer enough to have a climate change policy, fund managers need to be able to demonstrate action to implement and tackle any climate related issues identified.
The guide, Climate Change for Private Equity Investors, was produced by KPMG, the Institutional Investors Group on Climate Change (IIGCC) and the Principles for Responsible Investment (PRI). It aims to assist private equity Limited Partners (LPs) and General Partners (GPs) better understand, assess and monitor, the investment opportunities and risks presented by climate change, its mitigation and the increasing global regulation driving towards a low-carbon economy.
These risks and opportunities are increasingly a core feature of sustainable and responsible investing strategies, particularly as climate change presents one of the biggest threats to modern society and long-term investment performance. Therefore, investors and portfolio companies should be thinking how to adapt their business strategy, risk management and reporting models to account for these factors and significant changes in policy and regulation to ensure sustainable returns.
James Holley, UK Head of Responsible Investment at KPMG, says: “As we become more aware of the physical impacts of climate change and associated risks and opportunities, investors need to broaden the scope of their environmental due diligence processes, beyond traditional issues such as contaminated land liabilities and non-compliance with environmental permits. LPs have become more focused on climate change and carbon in recent years and GPs need to align their investment practices to take into consideration these issues; failure to do so and effectively report progress to LPs could affect their ability to raise funds in the future.”
The guide provides details on current and emerging practice in the developing area of assessing climate change impacts on private equity investments. It summarises the rationale for incorporating climate change concerns in private equity investments; and presents a framework that LPs and GPs can use in due diligence and when engaging with their fund and portfolio company investments.
Tom Brown Partner and Global Head of Investment Management, KPMG adds: “There is an increased focus on climate risks to investments, particularly following the important developments at COP21. As a result, we are seeing that investors are looking to evaluate the climate risks and opportunities in their portfolios.
“By providing consistent guidance, and seeking to align LP and GP interests on climate issues, this publication provides both institutional investors and private equity funds with greater certainty on the process to manage climate risks and opportunities in the investment process.”
Robert Ohrenstein, partner and global head of private equity, says: “Environmental, Social and Governance (ESG) or responsible investment is being proactively adopted by many of our clients to enhance their portfolio company performance, identify risks and create value. Consideration of risks and opportunities from climate change is a key component. We are seeing ESG more actively included as part of our due diligence process and embedded in the governance of our GP clients and their portfolio companies. As LPs place greater emphasis and requirements for ESG policies from their fund managers, we are providing significant support to clients and anticipate growing interest in this area.”
