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Setting the agenda on climate change

23 Jun 2021

Climate change is one of the most significant ESG issues facing investors today. Maaike van der Schoot, the Responsible Investment Officer of AlpInvest Partners, explains why investors need to protect their portfolios from risks and expose them to opportunities in the shift to a low-carbon global economy.

The issue of climate change represents one of the most important issues of our time, generating unprecedented challenges and opportunities for businesses and investors alike. Companies that can navigate these mounting challenges – from physical risks to regulatory shifts and technological disruptions – and seize the emerging opportunities of the energy transition, will likely have the climate resilience to thrive in this new landscape.

It is becoming increasingly clear that climate continues to scale the investment industry's agenda and it is essential that more private equity managers (or GPs) participate in the discussion on climate risk as it becomes more urgent. Businesses are waking up to the global call for action to tackle climate change and critically, we believe this is an investment area where profitability and driving positive environmental change aren’t at odds – they are convergent with each other.

While a growing number of governments have announced their own net-zero targets, we are now seeing a significant shift in societal demands with consumers increasingly choosing companies – and therefore their products and services – who share their environmental concerns. As governments move to deliver on their commitments, shareholders and customers increase their demands for accelerated action in the private sector. Regulation is now evolving hand-in-hand with investor pressure and businesses are also moving forward with their own net-zero commitments.

We see larger corporations now beginning to understand and address climate risks. As they consider options to reduce their carbon exposure, there also appear to be opportunities in their value chains. Private equity managers are increasingly making this a priority and seeking to affect change across their portfolio companies. For GPs, there is a value in monitoring material climate exposure across their portfolio companies and developing their own internal capacity to manage these issues and opportunities. The recently published Invest Europe Climate Change Guide is a good resource for getting up to speed on the topic.

As part of its long-standing commitment to responsible investment, AlpInvest seeks to engage with other large private equity investors and GPs to promote sustainability broadly across the industry. As investors in private equity funds, we have an intrinsic interest that climate-related risks and opportunities are identified and addressed across our portfolio.

It is important to remember that not all companies and not all sectors are equally exposed to the impact of climate change. We have observed that GPs are increasingly investing in their ESG integration processes to help dive deeper into specific issues, presenting opportunities for value creation, not merely risk mitigation. AlpInvest is committed to identifying the investments that are substantially affected by climate change, and we also seek to avoid investments in thermal coal, which has among the greatest greenhouse gas emissions of all fossil fuels.

GPs across the private equity spectrum are recognising the opportunities and risks associated with climate and assessing climate exposure should be an investment consideration for investors. LPs that identify the most carbon intensive pockets in their portfolio and address them, will ultimately affect their ability to generate high-level long-term value.

Going forward, we think that GPs should expect to be asked more climate change focused questions and they should have an intelligent understanding of how climate affects their portfolio and investment strategy. Meeting reporting requirements from LPs and regulators represents another important aspect, and the European Union’s new Sustainable Finance Disclosure Regulation (SFDR), which recently came into effect and imposes new transparency obligations and strong reporting requirements on the financial industry, has both the scope and the impetus for investment firms to begin thinking seriously about their climate roadmap if they are not already.

Maaike van der Schoot
Responsible Investment Officer
AlpInvest Partners

 

Our Climate Change Guide

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