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Private equity remains untapped source for climate financing: Ceres

09 June 2021 Amena Saiyid

Private equity firms ought to tap more into the investment opportunities offered by clean energy and low-carbon technology as the global energy transition gathers pace, a report released 8 June recommends.

Penned by Ceres, a nonprofit sustainable network of institutional investors, and SustainAbility Institute by ERM, the report, Changing Climate for Private Equity, said private equity firms remain an untapped source for clean energy investment that could help the world reach net-zero goals by midcentury.

Private equity firms invest directly into companies and assets, generally with a longer-term horizon, deploying capital on behalf of limited partner investors, the organizations said.

"While many businesses and financial system actors have committed to reach net zero by 2050 or sooner, private equity has been slower to act. We believe that action is essential and overdue," Ceres said.

The level of investment in clean energy projects or climate solutions by private equity is growing, though not at the same rate as investment by publicly held companies. The report cites a lack of universally adopted and mandated frameworks and standards to guide climate-related disclosure of financial risk as a key barrier to greater adoption.

Limited confidence

In the absence of harmonized data disclosure, private equity firms have limited confidence they can accurately assess the risk that the climate crisis poses to their financial investments, and their ability to make informed decisions about how these opportunities align with the 2015 Paris Agreement's goal to limit global warming to less than 2 degrees Celsius compared with pre-industrial levels, it said.

The bottom line is that "private equity is falling short on climate discipline compared with publicly held companies," Dazzle Bhujwala, director of Ceres' investor network and one of the report's lead contributors, told IHS Markit in an 8 June telephone interview.

The report's authors, including Bhujwala, reached these conclusions on the basis of deep-dive interviews conducted with 27 of the largest private equity firms' general partners, who manage the assets, and limited partners who invest those assets, in North America and Europe. The authors wanted to understand the firms' practices and the barriers that prevent them from stepping up to the plate, and to illustrate what more can be done to draw them into the climate investment space, where institutional investors have taken a greater role.

An International Energy Agency (IEA) report released 9 June also observes that private investment has not kept up with the need for clean energy investment, especially in the developing world. The IEA recommends that by 2030, private and public investment in the cleantech space in the developing world should reach $1 trillion annually, compared with about $150 billion in 2020.

Influence on the rise

The importance and influence of private equity firms is on the rise. According to the Ceres report, assets under management in the sector nearly tripled in the 2010-2020 decade, and are expected to almost double between 2020 and 2025, "dramatically extending private equity's reach."

Collectively, 18 general partners of major private equity firms, which include Apollo Global Management, The Carlyle Group, EQT AB, and TPG Capital, interviewed for the report have $1.9 trillion in total assets under management, and represent 14 of the top 100 private equity firms globally. The nine limited partners interviewed, including the California Public Employees Retirement System (CalPERS), Church of England Pensions Board, and Ontario Municipal Employees Retirement System (OMERS), for this report represent five of the largest 100 global asset owners, with a collective $1.3 trillion in total assets under management.

The report acknowledges that not all private equity firms are out of step with climate financing, but it insists that limited partnerships (LPs) could be exerting more influence than has been the case historically to increase integration of climate-related risks and opportunities. While this is improving, Bhujwala said, "more work is required."

TPG Capital recently raised $100 million for Climavision, a Louisville, Kentucky-based climate services and intelligence platform. Canadian private equity firm Brookfield Asset Management in February announced plans to raise at least $7.5 billion for a new climate-focused fund.

CalPERS, the world's largest pension fund with about $455 billion assets under management, is an example of an LP that has integrated climate solutions into 20% ($15 billion) of its private equity portfolio.

Both Brookfield Asset Management and CalPERS also are part of the Net Zero Asset Managers Initiative, a program set up for investors in December 2020 to support net-zero emissions goals through all its holdings by 2050 or sooner.

"Several other LPs we spoke to are engaging with their private equity managers to refine and scale their climate policy practices," Bhujwala said.

Solutions

To address the relative lack of participation, Ceres encouraged private equity firms that are engaged in climate investments to share best practices, called for regular engagement of boards on climate issues, and recommended building in-house expertise to understand risks posed by climate change and for teasing out investment opportunities.

On 8 June, Ceres announced the creation of a working group for private equity managers and their limited partners.

Ceres said it expects private equity managers who follow the recommendations of the report will join other institutional investors in issuing Investor Climate Action Plans and make credible net-zero portfolio emissions commitments.

The report's focus on what private equity firms can do more to align themselves with the evolving appreciation of climate risk as both a short- and long-term factor in their investments is what IHS Markit Cleantech Executive Director Peter Gardett found both "interesting and different."

"To shift portfolios and capital allocations more meaningfully will require changing internal standards alongside quantifying the upside of buying into energy transition opportunities, and it is notable that Ceres focuses there, and not on the impacts of any of the proposed regulatory or legislative changes that get the most headline space," Gardett wrote in an 8 June email.

Posted 09 June 2021 by Amena Saiyid, Senior Climate & Energy Research Analyst, IHS Markit

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