The guidance:
- is targeted at the private equity firm level, i.e., a private equity firm cannot set SBTs at an individual fund level
- requires private equity firms to set a target covering its scope 1 and scope 2 GHG emissions
- ‘recommends’ private equity firms set a target covering its scope 3 categories 1 to 14, i.e. employees business travel, purchased goods and services, etc.
- requires private equity firms to set a target for their scope 3 category 15 emissions. Category 15 covers all of the private equity firms’ investments, i.e. their portfolio companies
- does not require all asset classes to be included in the private equity firm’s target
- requires the private equity firm to state the planned actions for reducing GHG emissions
- strongly recommends that private equity firms complete an annual disclosure of progress toward achieving the targets
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Guidance was launched on 08 November 2021
To enable the wide adoption of science-based targets (SBT) by private equity firms, the Science-Based Target Initiative (SBTi) has launched new Guidance tailored for the private equity sector. The Guidance was principally authored by the SBTi and Anthesis, supported by the UN Principles for Responsible Investment (PRI) and signatories of initiative Climat International (iCI).
Alongside the launch of the Guidance, six leading investment firms representing €139 bn assets under management (AUM) announced their commitment to setting ambitious SBTi-approved climate targets. Anthesis Group supported one of these six, Hg ($35 bn AUM) in setting its SBTs.
Why private equity specific Guidance?
In October 2020, the SBTi launched Guidance for the Finance Sector [updated in April 2021]. Several private equity firms provided feedback that the guidance was not tailored enough to allow private equity firms to adopt the guidance.
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Key actions for aligning with the science
A private equity firm aligning with SBTs will:
1. Need to activate significant GHG reductions in the real economy (broadly the production and flow of goods and services) across its portfolio company investments.
2. Help drive the market shift needed to transition the private equity sector towards a low carbon economy.
3. Need to make SBT GHG reductions a key priority both pre- and post-acquisition to ensure the long-term resilience of its investments.
4. Engage its portfolio companies in setting their own SBTs for buyout and growth capital asset classes (definitions of the asset classes are in the Glossary of the Guidance).
5. Influence its investments in private debt, funds of funds and secondaries to also work toward measuring and reducing GHG emissions in line with SBTs as far as practicable.
6. Disclose transparently its progress toward meeting the targets, including the actions to mitigate GHG emissions.
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How is private equity different to the wider finance sector?
The private equity sector is unique to financial institutions in various ways.
Key Differences:
- Private market maturity – the private equity business model focuses largely on increasing the value of the portfolio company by putting in place governance structures, covering aspects such as operations and strategy, to improve the information about the business.
How this affects the Guidance: The Guidance needed to consider the heavy lifting a private equity firm does in transforming portfolio companies post-acquisition.
- Public market regulation – public market companies are subject to more regulation than privately-owned companies and thus are more advanced in terms of the ability or governance structure to collect and disclose information about their business.
How this affects the Guidance: The Guidance needed to consider the difficulties private equity firms face in influencing portfolio companies to take the bigger step to sign up to SBTs.
- Greenhouse Gas (GHG) immaturity – there is a general immaturity of GHG footprinting in the investible private market. Only <0.03% of private companies (17,000,000 according to the S&P Global 2021 report) report to the Carbon Disclosure Project (CDP), and only 37% of these have emissions reduction targets.
How this affects the Guidance: The Guidance needed to consider the relatively poor carbon data availability of portfolio companies.
- Mass exits – a private equity firm can sell anywhere up to ~50% of their portfolio companies in any given year, a proportional change in AUM far greater than any other financial institution.
How this affects the Guidance: The Guidance needed to consider portfolio company churn, illiquidity and exit strategies.
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The new ‘Private Equity Sector SBT Setting Guidance’ provides private equity firms with a route to aligning their investment activity with best practice across the wider investment industry, recognising the steep transition required to transform the private market.

What it means in practice
A private equity firm that wishes to align with the Guidance will first need to explore what a SBT could mean for its future investment decisions, dependent on its strategies, i.e., the asset classes it holds. The Guidance applies to six asset classes. Some are required and some are optional.
Each asset class has a specific boundary definition within the Guidance, defining how much of the private equity firm’s portfolio of investment falls in or out of the Guidance.
‘Buyouts & Growth Capital’ are defined by percentage share of equity, while venture capital is also defined by the size and age of the portfolio company.
Methods for private equity companies to align with:
For each asset class, the SBTi suggests a recommended method to align with. There are a total of three methods, adopted from the SBT Guidance for Finance Sector [April 2021].
If the private equity firm is a multi-strategy firm with several of the above asset classes, such as real estate and buyout, it will have to adopt two methods, one for each of the asset classes: sectoral decarbonisation approach and portfolio coverage approach, respectively. The private equity firm will then need to set an SBT for each asset class and disclose the language concurrently and consistently using the Guidance.
Sectoral Decarbonisation Approach (SDA)
The Sectoral Decarbonisation Approach (SDA) is a subsector-level approach intended to help portfolio companies/ assets that are more energy-intensive/ homogeneous to align their emissions reductions targets with a well-below 2°C or 1.5°C pathway.
In this example, private equity firms with ‘electricity generation’ and ‘real estate’ assets are required to undergo a data collation and modelling exercise to establish their SBT pathways. The SDA method is one of the traditional methods from the SBTi and is used widely across corporates who have approved SBTs. Once the targets are set in practice, it means implementing aggressive decarbonisation mitigation to achieve the absolute reductions required. The challenge is the level of investment required to meet the longer-term reductions needed, especially for private equity firms with large real estate portfolios or difficult to transition electricity generation assets.
SBT portfolio coverage approach
The SBT portfolio coverage approach is an engagement-based approach. It can be best described as a “target of targets”, whereby the private equity firm is required to set a five-year target, using a selected metric (GHG emissions (SBTi’s preference) or financial), to sufficiently cover portfolio companies setting their own SBTs, in line with a linear trajectory to 100% of portfolio companies setting SBTs by 2040.
The largest and most common asset class by AUM across the private equity universe is ‘Buyout and Growth Capital’ and the SBTi recommends using the portfolio coverage approach for this asset class.
In this example, the private equity firm is required to increase coverage of SBTs by 5% annually to reach 100% coverage by 2040. In practice, this means that by 2025, a total of 25% of the private equity firm’s total invested capital is required to be covered by SBTs. Furthermore, the private equity firm forecasts 100% coverage of SBTs across their portfolio by 2032, more ambitious than the 100% coverage needed by 2040.
The advantage of this method is the ramp-up of coverage from now until 2040. This means there is an opportunity for private equity firms to start small and increasingly influence additional portfolio companies to set SBTs and reduce real economy GHG emissions. The challenge could be the resource required for larger private equity firms with a high volume of portfolio companies to engage and support portfolio companies in setting SBTs.
The Temperature Rating Approach
The Temperature Rating Approach rates all portfolio companies with a temperature score, based on their GHG footprints and any existing GHG targets. In the absence of an existing GHG target, the portfolio company is given a default score of 3.2°C. The private equity firm then sets a target to reduce their aggregated temperature scores across all portfolio companies, to a minimum < 2°C scenario for the portfolio companies own scope 1, 2 and 3 by 2040.
In this example, the private equity firm is required to score all portfolio companies/ borrowing companies within the boundary at the outset of adopting the method, i.e., there is no ramp-up in coverage. The method uses an online tool to enable the translation of any existing GHG emissions reductions targets into temperature scores at a portfolio company/ borrower company level. For each of these companies there is a requirement to obtain GHG emissions data for the temperature rating tool. Where this is not available, proxy data can be procured from a third party such as CDP.
The existing or new GHG emissions reductions targets for each portfolio company/ borrowing company do not need to align with SBTs. This means, SBTi validation is not required for each of the emission reduction targets of the individual portfolio companies/ borrowing companies. It is however strongly recommended by SBTi that robust GHG targets are adopted, or the temperatures scores will not lower sufficiently. The challenge will be the leverage of influence to ensure that each individual company reduces their temperature scores from more robust GHG emissions targets and ultimately evidenced reductions.
Practical steps
After exploring what a SBT means for the private equity firm, the key pre-requisite step to setting a SBT is to commit to the SBTi. The firm then has two years to set their own SBTs which includes the below steps 1 to 8.

The Challenges
The key practical challenges for private equity firms in both setting and achieving SBTs:
- Education – the SBTi framework for financial institutions, in general, requires significant digesting, and often consultancy support to understand what setting SBTs at private equity firm level, and then for individual portfolio companies, means.
- The GHG data required – portfolio companies will need to provide robust GHG data for the private equity firms firm-level SBT. The SBTi recommend using GHG emissions for the portfolio coverage approach, while GHG data is essential to the temperature and SDA approach. This data could be particularly difficult to access for borrowing companies.
- Reduction plans – carving out the mitigation actions required to meet the GHG emissions reductions needed is one challenge, while optimising when and how to implement the chosen solutions is the more pressing challenge.

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The Need
One unexpected outcome of developing the Guidance has been the broad uptake of SBTs from private equity firms. At the time of writing, private equity firms are the leading financial institutions in aligning with SBTs. There is an urgent and pressing need for more private equity firms to do the same for the following reasons:
- Private equity firms that align with the Guidance will help the market shift needed to transition to a zero-carbon economy.
- The more private equity firms that sign up, the easier it will be to influence assets to set targets and reduce emissions.
- Private equity firms, through their long-term investment strategies and considerable influence over their portfolio companies, are particularly well-positioned to support portfolio companies for a low-carbon transition.
- As an asset class that has experienced and will continue to experience tremendous growth and influence, it is critically important that the PE sector take immediate actions to facilitate the transition of the private markets to a zero-carbon economy by 2050.
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