Navigating sustainability: the Private Equity perspective

March 21, 2022
min read

How important is climate change to investors?

In a recent survey conducted by the investment firm Coller Capital, over 75% of limited partners prioritized climate change and sustainability in investing over the next five years, claiming it to be an extremely influential trend. Coller Capital further discovered that 47% agreed that a focus on ESG policy is crucial to improving long-term private equity returns. The study concluded that not paying attention to climate change, also in the investment business,presents risks to long-term performance.

In fact, billionaire investor and CEO of BlackRock, Larry Fink, has been quoted saying “We focus on sustainability not because we’re environmentalists, but because we are capitalists and fiduciaries to our clients”. Sustainability in business is no longer simply a social responsibility, it has been proven to have financial significance. No wonder that 300 global corporations have jumped onto the bandwagon of committing to achieve net-zero. In addition, 90 private equity firms representing $700 billion in assets under management have made climate commitments following the 2021 UN Climate Change Conference in Glasgow.

Why does participation in sustainable investments have financial significance?

Elaborating on Larry Finks point, the reason that sustainability is part of capitalist incentives today, is because competition is no longer purely between the traditional price or marketing strategies. Branding in terms of sustainability and social responsibility mark the leaders of present-day industries. Choosing not to participate in this trend, puts a business at risk of falling behind. Innovations in this ever-changing technological world are key to survival.

As Fink further remarks, scientists and engineers are continuously finding creative solutions for the decarbonization of cement, steel and plastic. Trucking, shipping, and aviation, as well as agriculture, energy, and construction, are undergoing unprecedented transformations. Fink emphasises his belief that “the decarbonization of the global economy would create the greatest investment opportunity of the era”.

Frameworks to help you succeed

Besides having to navigate the regulatory space of sustainability when investing, private equity firms are often demanded by LPs to consider their own carbon footprint. Measuring emissions, building a reduction strategy and decarbonizing their investments have become increasingly important. One of the frameworks to measure decarbonisation and progress towards net-zero is the Science Based Target initiative (SBTi). In November 2021, the SBTi launched a Private Equity focused Sector Guidance report in order to guide investors through uncharted territory of building a strong carbon reduction plan. The goal is to achieve net-zero by 2030 or 2050 by aligning both operations and investments of these funds with their greater decarbonization goals. The SBTi’s private equity-specific initiative is additionally supported by the UN PRI and the Initiative Climat International. To date, it has already successfully validated plans of 6 major private equity funds.

How Coolset helps GPs

Coolset helps private equity investors work with their portfolio on measuring, analysing and, most importantly, reducing their carbon footprint. Through our seamless integrations, we help investors analyse and monitor portfolio performance through a centralised dashboard. In addition, we are supported by the world’s leading sustainability consultants in providing tailored solutions for complex projects.

Feel free to contact us for use cases on how we currently help private equity decarbonize.

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