Earlier in 2021, private markets firm HarbourVest appointed consultants from BSR to map out three different climate change scenarios for its senior team: one where the planet warmed by a relatively modest amount by 2030, and two other more extreme scenarios. The team then analysed how these different outcomes would impact BSR’s business and investments.
The results were alarming – this was a major reason that the firm has signed a pledge, alongside 586 other investors, urging governments to increase their ambitions and policy actions ahead of the UN Climate Change Conference in November.
“That exercise certainly prompted that conversation” says Peter Wilson, managing director at HarbourVest. “Climate change is an issue that affects the whole economy.”
A handful of other private equity managers also signed the pledge, including BC Partners, Hg, TPG Capital and Palatine Private Equity, but the list was dominated by banks and pension fund managers.
Most experts believe that the COP26 conference, which will be held in Glasgow, has a unique urgency. It represents one of the final chances to limit global warming to below 1.5C and avoid a climate catastrophe.
New Private Markets spoke to several firms to understand what they want to see from the climate change conference and how their approach is changing.
Private markets have long ignored global warming, lagging behind publicly listed financial firms. But the wildfires, heatwaves and flash floods of the past year, combined with an increasing investor focus, mean that many in private markets are waking up to the impact that climate change could have on their business models and investments in the near future. Many now want concrete action from politicians at COP26.
HarbourVest’s Wilson wants greater recognition of the important role that private companies – and the organisations that own and manage them – have to make in addressing climate change.
“If we are to achieve ambitious, economy-wide decarbonisation by 2030, we need to be engaging with companies to start decarbonising now,” he says. “And private equity managers are very well positioned to support that process, often at a critical stage in a company’s life cycle.”
He adds that “we need policy that will shift the whole economy and create significant investment opportunity”, such as scaling up renewable energy and new policies to assist in the transition to clean energy.
James Magor, director in the sustainability team at Actis, agrees that COP26 must deliver a co-ordinated and pragmatic pathway to net-zero to avoid becoming a “cacophony of virtuous proclamations”.
Actis, which manages $15 billion of investments in emerging markets, uses a ‘tool kit’ to determine whether assets align with a net-zero future and identify opportunities to adapt assets so that they have a greater role in enabling the transition.
Magor stresses the importance of the private and public sectors acting in partnership to achieve whatever plan is agreed at COP26.
“Climate change is the most urgent issue of our time”, he says. “This plan needs to incorporate a necessary period of transition and requires the private and public sector to work effectively together to fund and deliver the transformation.”
Tikehau Capital has also realised that climate investments represent a new opportunity. The €30 billion alternative asset manager wants to have at least €5 billion of climate-dedicated assets under management by 2025 and recently appointed its first ‘head of climate’.
Laure Villepelet, head of ESG and CSR at Tikehau, stresses the need for swift action to result from COP26 and urges financial services firms to do more to fight global warming.
“Despite all claims to the contrary, the financial sector is clearly not yet doing enough to tackle climate change,” she says.
“We have just 3,000 days left to prevent climate catastrophe… 3,000 days might seem like a long way off, but global temperatures have now dramatically increased, by 1.1C to as much as 4C in some local areas, with irrevocable and terrifying consequences.”
Tikehau is launching funds that directly fight climate change and biodiversity collapse. However, it also says it is ensuring that its mainstream investments are tackling the transition to a low-carbon economy.
“Fundamentally, we are arguing for a long-term approach and vision,” Villepelet says, adding that medium-sized companies, which are often privately owned, will play a vital role in driving a climate transformation.
TCFD and reporting standards
Alongside a roadmap to reducing carbon emissions, private markets professionals are pinning their hopes on new reporting standards to come out of COP26.
Mark Carney, the former governor of the Bank of England, has been leading the charge to make it mandatory for UK businesses to report their climate-related risks through the Task Force on Climate-Related Financial Disclosures. The rules will be in place by the start of the conference and mean the UK joins the EU, Singapore, Canada, Japan and South Africa in requiring companies to disclose information such as how climate change could affect buildings, investments and customer behaviour.
But when it comes to ESG, there are still at least a dozen widely used reporting standards, which leave investors with a complex ‘alphabet soup’ of reporting frameworks. The International Financial Reporting Standards Foundation is expected to launch its first framework for ESG reporting at COP26, which could help.
Paul Yett, director of ESG and sustainability at Hamilton Lane, which has $757 billion in assets under management and supervision, says he supports the new TCFD rules and hopes the industry can coalesce around standard ESG reporting guidelines.
“We want to see consistency in reporting on ESG factors, and recognise that most investors and managers share this sentiment,” he says. “The challenge is agreeing what that set of standards is, and getting broad adoption for it.”
Yett sums up what many in the industry hope to see from COP26.
“Global warming is the most significant challenge facing the planet,” he says. “Our hope is for co-operation from world leaders, along with urgency and action plans for change.”