Baking sustainability into the underwriting process

It is a natural next step: using the improved availability of ESG data to price in sustainability ‘upgrades’ and to identify (and cost) value creation opportunities as part of the underwriting process. It is becoming more commonplace in private markets and was cited by a number of sustainability leaders as a priority for the year ahead when we asked them for their 2024 priorities.

“We’re looking to increasingly incorporate sustainability in underwriting across all relevant investments in our portfolio,” said Bahare Haghshenas, global head of sustainable transformation at listed private markets firm EQT. “By calculating the cost of delivering sustainability initiatives at acquisition, we’re able to make better-informed decisions on both sustainability opportunities and risks.”

This is being made possible by the better availability of data. “We are seeing our own data and industry benchmark data become increasingly more decision-useful,” said Helen Gurfel, head of sustainability and innovation at real estate firm CBRE Investment Management.

“One example is that, at the time of acquisition, we ideally like to understand the energy consumption, GHG emissions and physical risks associated with an asset so that we can appropriately factor in any additional capex and opex required for the hold period of the asset.”

European private markets firm Permira has been piloting the application of a carbon price to its existing portfolio and some new investments, said Adinah Shackleton, its head of ESG. “This has helped us to take a view on the extent to which portfolio companies could be affected by potential regulated carbon pricing in the future, and allows us to identify the key opportunities to reduce this risk. We’re excited about taking this further in 2024,” she said.

Setting Science Based Targets

The Science Based Targets initiative has emerged as a ‘gold standard’ for credible portfolio decarbonisation strategies.

For mid-market private equity firm Genui, a top priority for the year ahead is to ensure it is on track to achieve its SBTi targets. Oakley Capital, another mid-market private equity investor, is “following the development of Science Based Targets, and other decarbonisation initiatives” with a view to getting on a decarbonisation pathway “in the near future”, said Aga Siemiginowska, head of sustainability.

“Our commitment to the SBTi gained speed,” said EQT’s Haghshenas. “At year-end, 49 portfolio companies had set or were in the progress of setting carbon reduction targets.”

Permira has committed to a science-based target which is currently undergoing the validation process, said Shackleton: “In any case, we’re already operationalising the target, as our baseline year is 2022.”

Plugging the next data gap

When it comes to having the right data to make decisions, there is a sense that huge progress has been made, but that much more work needs to be done. Each year brings a new area or indicator to tackle.

“One of our objectives is also to be able to report on our progress against Schroders’ net-zero commitments across private asset classes,” said Maria Teresa Zappia, head of sustainability and impact at Schroders Capital, and deputy CEO of BlueOrchard. “While some asset classes are more advanced, such as real estate, the goal is to develop decarbonisation plans across our portfolio.”

“ESG data is improving, but it is still far from perfect in private assets. Our platform sits across four pillars and eight different investment divisions, and we still see huge discrepancies.”

In Europe, the advent of the EU Corporate Sustainability Reporting Directive is expected to drive up standards of ESG data collection. It will be “a game changer”, said Zappia: a thought echoed by Shackleton and Siemiginowska.

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