Private equity industry doubles down on reducing carbon footprint

Climate change

LGT Capital Partners ESG Report 2020 reveals that 81 per cent of private equity managers already integrate ESG into their investment process, and a large part of the focus is shifting toward climate awareness.

According to Keimpe Keuning, executive director at LGT Capital Partners and one of the authors of LGT's report, climate issues continue to grow as a priority on the agenda for firms in the financial industry.

In his view, there are two pressing issues in particular to deal with for the private equity industry: working toward standardising data in order to monitor adherence to the Paris Agreement, and specific goal setting when it comes to private equity firms’ portfolios.

The Paris Agreement was launched in 2015, and aims to keep the global temperature increase at a minimum level by limiting carbon emissions. “All businesses need to lower their emissions. It’s crucial that we use this time to track data on how businesses develop and how to change emissions,” said Keuning.

“Long term goals are important, but if we don’t start now we’ll never get to being net carbon zero by 2050,” commented Keuning, and continued: “it's important to look at 'how do you create a framework for working towards specific outcomes in your portfolio'?” 

Vaughan Lindsay is CEO of ClimateCare that finances, manages and develops climate projects around the world. The company works with corporates that are looking to take responsibility for their climate impact and want to use carbon offsetting as part of their strategy. Reducing companies' carbon footprint is at the heart of what they do.
 
Lindsay's advice for private equity firms that want to make a difference is clear. “First of all, measure and understand your footprint. Most private equity firms don't even know what their carbon footprint is. Secondly, reduce it as much as you can. Where you can’t reduce it, you should take responsibility and offset it,” he explained.

The Net Zero objective outlines longer term action, but one of the things that have shifted immediately since the start of the pandemic is consumer awareness, in Lindsay’s view.

“Consumer pressure has intensified over the last 18 months and that has shown no signs of reducing during the pandemic," said Lindsay.
 
He continued: "If companies are not responding to what consumers are looking for, they won't be good businesses. The forward thinking companies realise that not only is it good for the planet, but it also enables you to attract business and retain customers better than you would otherwise do. So there is a fundamental business driver to much of this change.”

ClimateCare has seen a substantial uptick in demand for both its corporate and individual services over the last 18 months and this has not abated since the start of the pandemic.

“I’d say there’s been a 30-40 per cent growth in the market. The interlinked issues between Climate change, our relationship with nature and Covid-19 has also encouraged many corporates to take full responsibility for their carbon emissions now instead of putting this off. Many of them have realised that if we are to build back better we all need to retool, rather than simply start the engine back up again.”” 
 
One of ClimateCare’s targets is to cut 50 million tonnes of CO2 and improve 50 million lives by 2025, which Lindsay says they are well on target to achieve.
 
”Private equity firms have an advantage in that they can choose what companies they invest in, for example low carbon businesses. They can also take responsibility for their investee companies by offsetting,” said Lindsay.

“The biggest challenge they have at the moment is measuring. Many of a private equity firm’s portfolio companies have never measured their carbon footprints at all. Measuring is a discipline in its own right,” he added.

Lindsay mentioned the fact that LPs won't even look at GPs that don't comply with certain ESG criteria today. “The axis of capital markets is shifting. Those that are not on board with this will find themselves out in the cold,” he said.            

LGT’s report also showed that Europe continues to lead in private equity ESG integration with 81 per cent of managers ranked as ‘excellent’ or ‘good’, compared to 63 per cent in Asia and 43 per cent in the US.