Low carb diet
Dietary regimes are rarely enough – fundamental lifestyle changes are key to long-term success. Similarly, private equity firms looking to decarbonise their operations from greenhouse gas emissions (GHG) should ingrain relevant processes into the firm’s operational veins.
“Understanding the baseline is key,” says Verdane’s sustainability lead, Axel Elmqvist. “A firm’s emissions across Scopes 1 through 3 need to be assessed, for which GPs can use either software tools or work with external consultants.”
PE firms will likely be familiar with GHG scopes while working towards ESG aims with portfolio companies, and many are now looking to their own operations. GHGs fall into three categories: Scope 1, which includes direct emissions stemming from operations owned or controlled by the firm; Scope 2, which encompasses indirect emissions arising from the generation of purchased or acquired electricity, steam, heating or cooling consumed by the firm; and Scope 3, which covers all indirect emissions occurring across the value chain, including both upstream and downstream emissions.
To measure their GHG emissions, firms vary in their preferred approach, with some stating that software made the monitoring and tracking process easier, while others relied on third parties to verify their calculation procedures and sense-check them.
In the long run, firms should be wary of simply offsetting their measured footprint to reach net zero, advise William Barrett and Jean-Philippe Boige, managing partners at Reach Capital: “Offsetting is a first step but we see it as becoming a basic requirement, a minimum standard. In the long run, it will not be sufficient.”
Across all the firms we spoke to, the consensus was that the next step is formulating a playbook. “For decarbonisation to be effective in the long run, it cannot simply be a matter of policy,” stresses Elmqvist. “It needs to be integrated in the overall operational strategy, be a concrete piece of the puzzle.”
A recurring theme is that ‘culture is set at the top’ and executing a plan to decarbonise is no different. However, it is ultimately a team effort. “Signalling and accountability should absolutely come from the top,” says Elmqvist. “But implementation lies with each team as they ultimately make the decisions that will impact emissions.” Depending on where action is needed, the responsibility is then delegated to the relevant department.
This ensures that decarbonisation, while overseen and guided by a central authority, at the end of the day becomes a personal responsibility, ensuring that it is engrained in every process undertaken within a GP.
Firms have moved beyond appointing dedicated staff to oversee ESG and provide mandatory training for all functions across their operations. NorthEdge has even gone so far as to include ESG into annual appraisals. “What we look at is tailored to an individual’s role,” explains Lucie Mills, partner at the firm and responsible for its ESG strategy: “It’s not a pass or fail, but it is factored into our assessment of how an individual has contributed to our collective objects over the course of the year, ensuring they continue to support us to achieve our wider ESG goals – which includes reducing the carbon emissions of our business and our portfolio.”
Personnel fitness plans
The plan to address decarbonisation should take all three scopes into account, addressing each one specifically. Bridget Beals, partner and co-head of climate risk and strategy at KPMG in the UK, proposes an approach in two phases: “Firstly, GPs will need to address their Scope 1 and 2 emissions. They would do this by reviewing and setting net-zero targets, and then building a plan to deliver these; most likely looking at using renewable energy sources, focusing on energy-efficiency measures and a reduction in business travel.”
She goes on to mention how Scope 3 emissions should be assessed in a second step: “The second area they will need to consider is their financed emissions. Here, the impetus is clear with the likelihood of mandatory reporting upon us.” Consensus points to Scope 1 and 2 emissions as the easier ones to deal with. Firms have introduced EV or hybrid schemes for business travel where applicable and shifted to modern offices, powered by renewable energy.
NorthEdge recently became the world’s first PE firm to achieve Gold Carbon Literate Organisation status from the Carbon Literacy Project. Discussing how the firm achieved this, Mills says: “Across Scope 1 and 2, we took a ‘Pareto’ approach. We located where 80% of our emissions came from and our initial plan is focused on understanding and decreasing these emissions.”
Harder to decrease and likely to make up the bulk of a PE house’s GHG emissions is Scope 3. Particularly when it comes to capital goods such as electronics, furniture and suppliers.
Office fitouts are the easy one of the three and GPs have resorted to making conscious choices of renewable energy suppliers and implementing life-extending measures such as reusing old furniture, or relying on furniture subscription services that provide rentable equipment.
Enemy of progress
Among the biggest hurdles to decreasing Scope 3 emissions are the necessity of frequent travel and the lack of control on the supply side. However, this should not be a deterrent, says Mills: “Decarbonisation is about progress rather than perfection.” Elmqvist mirrors the sentiment: “Private equity relies heavily on face-to-face interactions but there is a lot that can be done already. Corporate events can be planned closer to accessible transport and firms can look to combine in-person meetings and events by co-locating them.”
Eventually, these emissions will become an increasing area of focus, suggests KPMG’s Beals: “Building an understanding of the value creation and preservation opportunities across the deal cycle is critical for delivering lower-carbon outcomes. This will become particularly important as-climate related risks and opportunities link more fully to financial value.”
Dealing with suppliers is comparatively more difficult. While firms can request GHG emissions data, this is dependent on the counterparty’s willingness and the GP’s bargaining power. “Consistency of transparency is the biggest challenge on the supply side,” comments Mills. The good news is that GPs note increasing willingness from their suppliers to stay on top of this and provide increasing quantity and quality of relevant data and commitments.
The biggest contributor to a GP’s emissions is still their underlying portfolio. However, this does not deflate the importance of decarbonising the firm’s operations. While Scope 1 and 2 emissions can be decreased greatly with simple solutions such as using renewable energy or reusing (or even renting) furniture, Scope 3 is tricker and for some issues, such as business travel, there are currently no perfect solutions.
But this should not stop anyone as we collectively combat the negative effects of climate change. After all, the lightbulb was invented by the light of the candle.