Part II: Progress for the Privates
Although far behind its public counterparts, private firms have started heading in the right direction.
The unequivocal need for standardized climate reporting mechanisms cannot be stressed enough. Increasing market pressures being brought about to public companies, including pressure from investors, regulators, and consumers to boost transparency and performance are now widely evident.
In this regard, a recent survey conducted by Bain & Co. and the Institutional Limited Partners Association (ILPA) found that “70% of the institutions that private markets rely on most for capital have adopted environmental, social, and governance (ESG) policies, and 85% of those have carried out or are implementing policies aimed specifically at private equity investments. A full 93% said they would walk away from an investment if it posed an ESG concern, and 80% expect to ramp up requests for ESG reporting from general partners (GPs) over the next three years.”
Recent research has found that small- or medium-sized firms populating private equity portfolios have started to come under increasing scrutiny from investors as well as regulators. Mandatory carbon reporting standards have already started being rolled out in the European Union, with regulators in North America now also mulling new rules to boost the requirements of reporting.
An aspect that is very likely to fan the momentum in the sector is the shifting pattern of consumption to more environmentally-friendly products and to companies with greater adherence to ESG policies, with sustainability and fairness ingrained in the culture. Such forces, especially regulatory ones, are set to be the most critical factor in reducing the gap in climate reporting between public and private firms
“The Bain-ILPA study shows that a lack of specific data standards and best practices related to ESG is clearly hampering PE investors’ ability to consistently evaluate ESG performance across their portfolios. CDP finds that private companies are generally enthusiastic about seeking solutions and are responsive to reporting requests, especially from investors. Finding easier ways to comply appears to be the bigger conundrum.”
Although considerably lagging its public counterparts (read Part I here), private companies too have started making considerable progress. Some of the practical steps taken to get the ball rolling include:
- Focused plan: Establishing a focused plan of both long- and short-term ambitions, a high-impact basket of initiatives, and establishing credibility and maintaining momentum.
- Carbon baseline: Developing a carbon baseline plan to establish a starting point to correctly identify where exactly firms’ major greenhouse gas emissions are coming from and how to mitigate them.
- Ambition communication: Bain & Co. writes, “as with any critical shift in how a company operates, communication and buy-in starts at the top and cascades down through the organization. It’s up to leadership to model a serious commitment to pushing toward net-zero.”
- Tracking progress: Transparency is absolutely essential and maintaining a dashboard that tracks progress on all fronts is crucial.
Establishing a practical and credible roadmap to reduce emissions and mitigate environmental impacts is a rather complex undertaking, especially for firms intrinsically linked with various sections of a very globalized supply chain. However, as the need for it expands, the emergence of third-party services to help companies monitor emissions in real-time is becoming an increasing trend.
The CDP, for example, was set up to facilitate disclosures from portfolio firms, maintain transparency and properly handle environmental performance. Currently working with investors with over $2.3 trillion in assets under management, they created the world’s first-ever standardized climate change disclosure platform to model emissions based on report input data.
Bain & Co. concludes: “there will always be market players who try to escape scrutiny around their environmental footprint. But many private companies are simply searching for the best, most economical ways to measure their environmental impacts and mitigate them. New tools and methodologies are emerging every day. Investors, customers, employees, and regulators are all letting private companies know that now is the time to start putting those tools to work.”
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