While many private fund managers are making portfolio-wide net-zero commitments, setting out decarbonisation pathways and interim targets and progressing along these are proving to be a challenge. GPs and their sustainability consultants at Private Equity International‘s Responsible Investment Forum in New York this week shared the hurdles they are encountering.

Two of the most frequently named issues are resistance from internal and external stakeholders and the sheer size of the task of developing a decarbonisation plan for a large, diversified portfolio. The conference is being held under Chatham House Rule, meaning speakers cannot be identified.


“You have to make the case [for decarbonisation] to multiple different audiences within an organisation,” said a sustainability professional at one fund manager.

A real assets manager’s ESG head said they are caught in a tug-of-war between different priorities for different investors. “European LPs want us to sign every asset up to every [sustainability and energy efficiency] certification” as soon as they make the investment. US LPs, meanwhile, want the GP to generate a distribution of capital as soon as possible, they said.

“We need to make the business case when talking to leadership,” this ESG head added.  “It’s really hard to persuade the CEO” to spend more for greener materials and resources because, while these should result in higher asset valuations, the projected timeline for value growth will be contingent on “inherent unknowns, [such as] when green steel or green concrete will come down the cost curve and reach parity” with their higher-carbon counterparts.

ESG teams also have to persuade their firm’s deal teams, and one GP’s sustainability head had found that bringing up decarbonisation-related capex and opex [capital and operational expenditures] for the first time during the ownership period is not well-received by deal teams.

“Get out in front of them during the due diligence period” and get an understanding of what the decarbonisation opportunities and costs would be for a potential investment, a sustainability consultant advised. “Feed that information into the deal team so they can build it into their assessments and evaluations” for the investment before the deal is passed.

For another manager, “the friction is sometimes convincing the portco – folks who may never have cared about climate at all, and they’re several degrees away from either the European LP or the well-intentioned GP”.

The sustainability consultant agreed: “Portcos often have a lot on their plate, and to get them to focus on decarbonisation efforts, you need to be able to make that business case and explain the ‘why’.” The consultant advised GPs to start by working with portfolio companies “that have a clearer business case and it’s a relatively easy argument to make”, such as for more energy-intensive assets or where there is demand from consumers for lower-carbon products and services.

Analysis paralysis

Figuring out where to start is the other major challenge that fund managers face when attempting to draw up decarbonisation plans. A venture and growth fund manager’s ESG professional said they are struggling to get carbon footprint data from their portfolio companies, most of which they have non-control stakes in. Scope 3 data is particularly challenging, they added.

It is a fool’s errand to attempt to obtain and then verify all of this data across their entire portfolio before developing a decarbonisation plan, they said. “You don’t want to get too deep into that – you’ll end up with analysis paralysis.”

For a real assets manager’s ESG head, calculating the value creation or ROI of decarbonisation capex is “the real challenge”. The manager has footprinted its portfolio but is holding off from making a net-zero commitment until it has priced in the “really expensive capex… for the very last 10 percent of our carbon footprint”.

But diving right into decarbonisation plans without a total portfolio view has perils, too. One sustainability consultant described how a private equity client made an acquisition and immediately drew up plans to swap its fleet of vehicles to electric vehicles. This was the most obvious decarbonisation measure, but a deeper analysis identified lower-hanging fruits that cost a tenth of the capital expenditure for an equivalent climate impact, the consultant said.

“Come out in the middle,” the consultant advised. “Do some high-level analysis across everything to give you comfort that you’re going for the areas that make the most sense. But you don’t necessarily need the full, full picture to start decarbonising.”