Private equity firms can be catalysts to fighting climate change, here is how
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ew whitepaper, “Creating Value through Sustainability in Private Markets,” released by the World Economic Forum offers key steps the private equity industry can use to drive change. This is after the study, which was done in collaboration with Boston Consulting Group (BCG), explored how the private equity industry has a unique opportunity to be a key driver in fighting climate change. With its full ownership model and relative freedom from short-term pressures, the industry is well placed to lead the way in capturing value through sustainable transformation of their investments. “Many private equity firms are missing out on opportunities to create real financial value through long term, sustainable investments,” says Shrinal Sheth, Lead, Investing, World Economic Forum. “Industry leaders who are interested in driving climate solutions must act quickly to ensure their firms are operating in ways that allow them to successfully create sustainable value.” However, key barriers like knowledge gaps, internal organization misalignments and an overfocus on divestment are still blocking the private equity industry from fully realizing its potential in driving sustainability shifts. Transforming “Grey to Green” assets Instead of divestment-only approaches, the study shows that private equity firms can improve the sustainability performance of currently high-emitting assets by investing in long-term opportunities to make them greener. In fact, the industry is ideally positioned to play this role, due to its full-ownership model and longer time horizon, relative to public markets. “Many private equity investors avoid ‘grey’ or high-emitting assets in an attempt to decarbonize their portfolios,” said Greg Fischer, a partner and director at BCG, and a co-author of the whitepaper. “This is a missed opportunity. We cannot divest our way to
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global Net Zero. Meeting the world’s decarbonization challenge requires investment and engagement. Private equity—with its ability support strategic transformations and a longer horizon than public markets—is ideally positioned to meet this need, transforming high-emitting assets “from grey to green” and making real progress towards our global ambition.” Three key enablers for this transformation include: • Change-over-time emissions reduction frameworks to supplement existing levels-based portfolio emissions targets
• Carbon pricing to help investors to more directly capture the value of their decarbonization initiatives during the holding period • Clear retirement and decarbonization policies for high-emitting assets that explicitly define the intended trajectories, provide incentives for sponsors to undertake bold sustainability transformations and make owners accountable for ensuring that the high-emitting assets they divest are sold not to the highest bidder but to new owners with well-defined decarbonization plans
