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30 Big Ideas Shaping ESG: Environment

Climate change is taking centre stage as funds move to measure emissions and integrate changes so they are maintained post-exit.

A tool to calculate GHG emissions

Apollo Global Management

The challenge: Measuring greenhouse gas emissions is a complicated and often subjective task, made even more difficult at the portfolio level.

The approach: To get around the variety of competing models, factors and possible inputs to calculate its businesses’ Scope 1 and 2 GHG emissions, the US investor devised its own tool that uses the most recent factors for stationary and mobile fuel combustion, and heat and electricity consumption. The result is standardised portfolio company reporting that has boosted disclosure (which assists comparability), while encouraging businesses to devise their own emissions reduction schemes.

Apollo says: “This tool has increased portfolio company disclosure of GHG emissions and brought new levels of accuracy, consistency and comprehensiveness to reporting.”

We say: Provides welcome transparency in an area often muddied by competing approaches.

Climate modelling for secondaries

Coller Capital

The challenge: How to climate model in secondaries where funds are a step removed from the underlying company.

The approach: Coller has accelerated its efforts to address climate change by undertaking a rigorous, forward-looking climate scenario analysis (both physical and transition risk) on all active funds. The analysis was undertaken by climate scientists and environmental economists in close collaboration with Coller’s ESG team. Coller shared these analyses with the GPs, helping them to draw up action plans on ESG best practice, especially climate-related risks and opportunities.

Coller says: “We have sought to take the lead on climate action in our field by raising standards on what can be achieved in addressing climate risk.”

We say: Coller attempts to show that secondaries firms can wield impact on GP attitudes toward ESG.

Integrating future climate considerations

FSN Capital Partners

The challenge: How to ensure ESG gains are maintained post-exit.

The approach: The Norwegian investor’s Climate Action project, inspired by the Task Force on Climate-related Financial Disclosures, provides a standardised way to consider climate risk and opportunities across the investment lifecycle. But the approach differs in that it intends for companies to remain sustainable after the GP has exited. Critically, in addition to raising awareness of climate matters to the deal and management teams responsible for integrating climate-related risk mitigation into the strategy, the forward-looking methodology aims to install a business model resilient to different climate scenarios.

FSN says: “With help from external experts, portfolio companies now assess the robustness of their business models and full value chains under three different climate scenarios.”

We say: Exit strategy is a crucial part of the ESG equation.

An ESG filter for private debt

Kartesia

The challenge: How to bridge the ESG information gap between lenders and their portfolio.

The approach: Providing liquidity and credit to European SMEs, the Luxembourg-based financing specialist recognised a need to boost ESG reporting from its portfolio companies. In partnership with Sustainalytics, the firm has launched a project to annually map its companies’ carbon footprint – the results for high-emitting borrowers are discussed with them – and estimate the overall weighted carbon-intensity of each of the firm’s funds. The firm foresees extending its application to factoring in carbon emission data in pre-investment decisions.

Kartesia says: “Often the biggest barrier to proper application of ESG filters and principles is the fact that many European businesses still do not report on climate-related metrics.”

We say: This is an early-mover in a fast-growing market.

Parcel delivery carbon offsets

L Catterton

The challenge: The environmental impact from the growing number of parcel deliveries.

The approach: The Small Parcels Contract launched by L Catterton will offset carbon emissions for itself and its portfolio companies linked to the delivery of small parcels. Launched in summer 2020, it is expected to offset 9,000 tonnes of carbon emissions in its first year. As the firm owns more than 45 businesses in North America alone, the scheme has the potential for broad environmental impact across its portfolio. The contract has also prompted ESG conversations between the GP and its brands around topics such as packaging and supply chain management.

L Catterton says: “L Catterton sees this offset programme as a small step towards a larger sustainability journey for both ourselves and our participating portfolio companies.”

We say: An important area for innovation.

A TCFD framework

Pantheon Ventures

The challenge: Encompassing the Task Force on Climate-related Financial Disclosure recommendations.

The approach: The Task Force on Climate-related Financial Disclosures has been instrumental in making financial services more aware of climate change risks. The European investor has taken the TCFD’s recommendations a step further toward implementation by producing a TCFD reporting framework that measures climate-related risks and opportunities in its infrastructure portfolios and shares information on its approach, including greenhouse gas emissions, with its clients. The next move is to use this framework to address the more complex task of measuring climate change risk in PE portfolios (in addition to existing GP due diligence reporting on the topic).

Pantheon says: “We have been an early mover in incorporating climate change decisions into our due diligence processes.”

We say: Has the potential to revolutionise climate reporting.