Decarbonisation pathways mean more than net-zero targets

Without short-term targets and transition plans for portfolio companies individually, net-zero targets by financial institutions do not guarantee decarbonisation of the real economy.

EQT’s half-year results presentation last week was heartening to watch. Seeing private equity’s world number three set out its decarbonisation plans before its financial results is a positive indicator of how seriously the private markets industry is taking the climate crisis and its responsibility to support mitigation efforts.

The climate science is clear. To limit global warming to 1.5 degrees higher than pre-industrial levels – our best chance of avoiding the most devastating effects of climate change – the global economy must achieve a 50 percent reduction in carbon emissions by 2030 and achieve net zero by 2050. Those were the findings of the UN-backed IPCC scientists at 2015’s COP 21 in Paris.

Six years later, a spate of financial institutions joined together in support of this global goal under Mark Carney’s Glasgow Financial Alliance For Net Zero umbrella, announcing net-zero targets for their own portfolios and financial activities. Many fund managers have set net-zero targets, Carlyle, Apax, Hg and Macquarie among them. Most of these are 2050 targets; a handful, such as EQT and Eurazeo, are targeting 2040.

Net-zero 2050 targets are ambitious, impressive, headline-grabbing pledges. But without interim decarbonisation targets, it is much harder to assess whether an institution is actually on track for net zero. It will be a different generation of executives that will be held to account if the institution misses its target in 2050.

The expectations of industry bodies for near-term plans tend to be on the mild side. Members of GFANZ are required to set interim 2030 decarbonisation targets for a portion of their managed assets “consistent with a fair share of the 50 percent global reduction in carbon emissions”.

This wording means institutions are not compelled to develop interim targets. Earlier this year, for example, the New York State Common Retirement Fund wrote a letter urging JPMorgan Chase, Morgan Stanley, Goldman Sachs and other GFANZ members to publish transition plans. Without these plans, NYSCRF wrote, “investors [are left] without adequate information to assess whether and how these institutions are achieving their net-zero commitments [and] their 2030 GHG emissions reduction targets.”

Net-zero targets also do not guarantee that a fund manager’s carbon footprint correlates with real-world decarbonisation or net-zero carbon emissions. Portfolio-wide targets mean that a GP could manage its portfolio companies in a business-as-usual fashion for now, and then meet its targets in 2030 or 2050 by divesting or offsetting.

For private equity, the Science Based Targets Initiative has higher short-term expectations – and it does not require firms to set long-term net-zero targets. EQT was the first private equity firm to receive verification for its targets by the SBTi; so far, only a handful of other firms have done so.

Firms must develop a decarbonisation pathway including short-term targets of between five and 10 years, and these targets must include a growing percentage of portfolio companies setting their own short-term decarbonisation targets that are verified by the SBTi. This means that the firm must roll out pathways at its current portfolio companies – even though they will likely not be under the PE firm’s ownership by 2050.

In the 27 remaining years to 2050, many companies and assets will pass through a private equity firm’s ownership. If every one of these is set on a decarbonisation pathway, achieving net zero of the real economy will seem far more attainable.