How private equity can help fight climate change

Sustainable private equity is key as investors scrutinise climate-related risks in their portfolios and investments.

Private equity firms no longer simply factor in the effects of climate change on their investment decisions. They actively seek to lessen the climate impact of their portfolio companies. Sustainable private equity is moving from niche to the mainstream.

At a roundtable with private equity and asset managers at the recent IPEM event in Paris, expert panellists from Intertrust Group and other organisations explored the role private equity can play in fighting climate change.

Human activity is changing the climate in unprecedented – and in some cases, irreversible – ways, according to the UN’s Intergovernmental Panel on Climate Change (IPCC). For the first time, the threat of climate change has been acknowledged at the highest level. Unless we act urgently, we will face increasingly extreme heatwaves, droughts and flooding.

So, what can private equity do to help halt climate change? Can the industry help to reverse the damage done?

Private equity impact investing supports climate compliance

Private equity has an opportunity to transform business models and help both listed and non-listed companies become more energy-efficient and climate-friendly.

For Pierre Abadie, Group Head of Climate and Co-Head of Private Equity Energy Transition at Tikehau Capital, focusing on innovation is not the only answer if the world keeps on emitting enormous quantities of CO2 every year.

“We cannot put more renewables into the system if we don’t change our way of using energy,” he said. Instead, sustainable private equity should focus on existing companies that are economically viable but need to reduce their carbon footprint, become more energy-efficient and rely on renewables.

Sustainable private equity should lead innovation too

However, there are expectations that private equity should also help foster the innovation required to tackle climate change.

Asset owners such as Alecta, the Swedish provider of agreed occupational pensions, need support to meet the level of innovation needed to create new sustainable models, said CEO Magnus Billing.

“We are more in the mature part of the investment chain and have to be so in order to be efficient towards our beneficiaries, but I think creating innovation is a role for private equity and we can step in at a later stage,” he said.

Alecta, which is owned by 2.6 million private customers and 35,000 corporate clients, has committed to achieving net-zero emissions across its portfolio by 2050.

This ambitious pledge is backed by the strong regulatory drive towards sustainability and net zero-emission targets, which has convinced investors and funds about the virtues of more sustainable portfolios. Environmental, Social and Governance (ESG) impact investing is key to this.

ESG impact investing as a source of new returns

Other asset managers, however, are looking at the wider impact investing sector to help support the economy and generate new return sources.

“Our primary role is to generate a return for our clients. In the current very low interest-rate environment, we’ve been looking for new sources of performance,” said Philippe Dutertre, a director in the asset management division of French insurer AG2R La Mondiale. But the company’s private equity and private debt portfolios have also been assigned a sustainable objective to support small businesses and employment in France – especially in the post-Covid-19 era.

Despite different approaches in the industry towards both ESG generally and ESG impact investing, sustainability is now widely seen as a necessary and critical benchmark for investment.

Intertrust Group: our commitment to the ESG vision

Our five sustainable goals are:

• Education: the education of employees and future employees is essential to our future
• Gender equality: we are committed to achieving gender equality in our workforce
• Economic growth: making sure our work is tied to economic growth
• Reducing inequality: we have introduced a new framework to ensure consistency in how we pay and recognise our people across different demographic groups
• Climate action: we are looking at more flexible working practices and digital transformation