The private equity (PE) net zero landscape until recently, has been complex, unclear and inconsistent, resulting in limited and varied net zero action and disclosure from private equity firms.
Co-authored by Anthesis in 2021, the Private Equity Sector Science-Based Target Guidance (PE SBT) helped kick-start PE’s efforts to get their portfolio companies (PCs) to set Science Based Targets (SBTs). However, as SBTs are only near-term targets, PE required further guidance to allow them to claim full alignment to net zero by driving the long-term and wider actions needed of their portfolio to reach net zero by 2050.
Since then, a complementary suite of net zero and decarbonisation guidance has been released. This article explains how this new guidance helps private equity companies at different points in their journey to understand how to align their portfolios to a net zero future.
What net zero guidance is available for private equity?
There are now three pieces of guidance that together provide private equity firms with the tools they need to align with net zero:
- The Private Markets Decarbonisation Roadmap (PMDR)
- The Net Zero Investment Framework Component for PE (NZIF for PE) – co-authored by Anthesis
- The Science Based Target initiative PE Guidance – co-authored by Anthesis
Once targets are set, there are several key initiatives to enable PE firms to transparently show progress and drive better data, such as the Carbon Disclosure Project (CDP), the ESG Data Convergence Initiative (ESGDC – EDCI) and the Principles for Responsible Investment (PRI) Reporting Framework. All these initiatives help PE firms to stay ahead of regulation, and drive action toward the Paris Agreement.
1. The Private Markets Decarbonisation Roadmap (PMDR)
The Private Markets Decarbonisation Roadmap (PMDR) was launched in November 2023 by the initiative Climate International (iCI) as a methodology for PE firms to start on their net zero journey. The PMDR is not designed as a target setting framework but as a communication methodology to help clarify language when disclosing the decarbonisation process. It is a great entry point for PE firms to understand the steps they need to take to influence and engage with the portfolio to progress toward net zero.
The PMDR provides:
- Common language, to communicate to stakeholders
- A framework to show meaningful progress, by disclosing their investments’ decarbonisation evolution
- A single methodology, to manage a multi-asset class portfolio
The guidance is designed on a principle of flexibility, enabling firms to choose what, who and how to disclose performance.
2. The Net Zero Investment Framework Component for the Private Equity Industry (NZIF for PE)
The NZIF for PE was launched by the PAII earlier this year. Unlike the PMDR, which is a communication methodology, NZIF for PE was designed as the go-to methodology for setting long-term targets for PE, including pathways for decarbonisation. It is suitable for PE firms who have started and want to set targets to net zero.
NZIF for PE reflects the highest ambition taken by a General Partner (GP).
This framework is best for:
- PE companies looking to set longer-term targets that are aligned to the science across a more flexible framework
- A broader methodology that includes a wider list of actions that go beyond those included in portfolio company SBTs
- Both Limited Partners (LPs) and General Partners (GPs) helping to cascade net zero alignment across the capital structure
NZIF for PE provides:
- Net zero target methodologies aligned to climate science
- Targets for investing in climate solutions
- Firm and fund-level commitments
Key similarities between PMDR and NZIF for PE
Together NZIF for PE and PMDR establish a foundational set of practices and metrics to create a clear roadmap for how PE can combat the climate crisis. The PMDR and NZIF for PE are similar and complementary in many regards.
At the heart of both pieces of guidance is a recommendation for measuring, setting targets and reducing GHG emissions across portfolios. Both methodologies also highlight actions that the GPs themselves could take to further decarbonise their portfolios.
With two new pieces of guidance released in 2023 (1. PMDR and 2. NZIF for PE), Anthesis was involved in authoring a whitepaper to help ESG practitioners quickly navigate the key similarities and differences in the methodologies and catalyse action. That guidance can be found here.
3. The Science Based Target initiative PE Guidance
Finally, the Science Based Target initiative Private Equity (SBTi PE) Guidance is there for GPs who want to validate and add credibility to targets along the way. Like NZIF for PE, the SBTi PE Guidance provides reduction pathways to support firms to reach targets.
As GPs evolve their climate ambitions and decarbonisation capabilities, PE firms should be pushing to validate targets via the SBTi, the gold standard of target initiatives.
This guidance is best for:
- Validating short-term targets
- Those who are focused on reduction, compared to showcasing investments in climate solution
- Setting a firm-level Scope 1 and 2 operational target
The SBTi PE Guidance does not currently fit all types of PE firms. For example, supplementary guidance would be required for firms with renewable energy assets and private debt.
The SBTi is due to launch the Financial Institution Net Zero (FINZ) Guidance next year and will offer a long-term target validation route that will help to further complement this space, with a single guidance document to cover all types of financial institutions. The SBTi will also continue to grow their sector guidance for corporates to provide validation routes for trickier to decarbonise sectors.
To summarise in the simplest of terms:
- PMDR is a communication methodology and is best for PE firms that have not started their net zero journey.
- NZIF for PE is a target-setting methodology, which is best for PE firms who have started and want to set targets to net zero.
- The SBTi PE Guidance is there to support PE firms to validate and add credibility to short-term targets along the way.
All three pieces of guidance prescribe three main steps: 1. measuring data, 2. setting targets and 3. progressing with reduction, which should form the core of any PE firm’s climate agenda.
With this guidance, the PE sector now has a platform to drive accelerated action toward net zero alignment. With net zero as a destination, a mindset shift and a lot of planning and action is required to get us there with significant value-creation opportunities available along the way.