Climate-friendly PE investments do not lead to lower performance, says Kearney

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Analysis from global consultancy partnership Kearney has revealed that private equity investments focusing on climate protection, besides having a positive effect on the planet, do not sacrifice profitability. 

The exploratory study, in conjunction with the Technical University of Munich and climate change-focused start-up 'right, based on science.', reveals that climate protection and attractive returns can go hand in hand. 

The study compared investments in 38 portfolio companies by European private equity funds with the aim of establishing their impact in three areas: the contribution to global warming of each of the investments by 2050, portfolios’ overall carbon emissions, and the impact on EBITDA. 

Kearney divided the investments into three core categories: the frontrunners, whose investment strategy is strongly oriented towards climate impact mitigation; the advocates, who integrate broader ESG factors into their investment strategies; and the agnostics, who have no real focus on the climate impact of their portfolios. 

Using a proprietary model by 'right, based on science.', Kearney found that investments made by ‘frontrunners’ and ‘advocates’, ie PE funds who factor in ESG into their investment strategies, would have a global warming impact of 2.5C (broadly in line with the climate targets in the Paris Climate Agreement), whereas those with little climate impact focus in their portfolios would have a warming impact of 4.1C, and are thus far from Paris-aligned. 

When it comes to carbon emissions, it’s a similar story. Using the International Energy Agency’s ‘Beyond 2 Degrees Scenario’, Kearney analysed whether each portfolio company was operating in alignment with its sector-specific emission goals. For companies invested in by frontrunners and advocates, there was a positive climate impact, where emissions fell below their industry-specific benchmarks. ‘Agnostics’, on the other hand, are operating at 1.0C higher than the target value for their respective industries 

The final element of the analysis is profitability – which was approximated in terms of EBITDA margins relative to climate impact. The analysis showed no indication that climate-impact investing and lower financial performance are linked. 

Alberto Fumo, Partner in Kearney’s Private Equity and M&A practice, comments: “There is no doubt that there is increased focus on responsible investing today. Companies can no longer ignore ESG issues and many are looking for a solution to balancing both personal and corporate values. The study showed no indication that a company’s commitment to climate is at the expense of financial performance. Private equity portfolios can make a positive contribution to climate targets, and at the same time remain economically competitive.”