Year in review: Decarbonisation moves up the agenda

At the start of this year, PAI Partners’ ESG head Esohe Denise Odaro described developing a decarbonisation strategy as a “key focus” for 2023. It seems that she was not alone in that thought; managers across the industry have been looking at how they can transition assets from brown to green.

For some, this has meant launching dedicated funds with a mandate to decarbonise. Argos Wityu, for example, launched its Climate Action Fund with a €300 million target in 2022 and held a first close on €120 million in September this year. The firm is targeting a 7.5 percent annual reduction in carbon intensity across the fund’s portfolio, and has linked 25 percent of its carried interest to achieving this target.

A survey from the firm found that only 38 percent of companies reported that they had invested heavily in decarbonising their business. Clearly, there is a funding gap that needs to be filled.

Manager activity was not limited to private equity: real estate managers such as Fidelity International, Atlantic Equity Partners and Ardian began raising funds with a decarbonisation mandate. Schroders Capital pivoted a publicly-listed REIT to a brown-to-green strategy last month.

One reason for these developments is that perceived regulatory hurdles are now seemingly being cleared. Market figures told us in February that transition-focused strategies had difficulty complying with Article 9 of the EU’s SFDR, limiting their appeal in the eyes of some impact-minded LPs. By the end of the year, this sentiment had changed, such that brown-to-green funds are now tentatively viewed as compatible with SFDR’s dark green category in at least some instances.

It should be said that some GPs have been looking at decarbonisation for a while. Australian private equity firm Adamantem Capital introduced an emissions angle for its second buyout fund in 2020; all portfolio companies implement reduction targets that aim to either eliminate or offset emissions within a decade.

Furthermore, some major private markets names are committing to decarbonisation, even if their firm has not yet launched a specific brown-to-green fund. Carlyle head of impact Megan Starr told us that she wants her firm to be investing in carbon intensive business on the grounds that they have the “biggest decarb potential”. KKR’s climate strategy co-head Emmanuel Lagarrigue said that private equity will play an “outsized role” in decarbonising heavy industry.

One in five respondents to a BlackRock survey released in September said they would like to see more private equity transition products in the market. Expect to see more firms plugging that gap in 2024.