This article is sponsored by Astorg.
The creation of guidance for private equity firms on setting and monitoring science-based targets on carbon emissions is a major development for the industry. Published in November 2021, the guidance was drawn up by the Science Based Targets initiative in conjunction with a working group consisting of representatives of more than 30 firms.
Private Equity International caught up with working group member and Astorg ESG director Viviana Occhionorelli to find out more about how the guidance came about, what’s involved in committing to the science-based targets and how climate-related practice will change over the coming years in private equity.
How did the SBTi come to work with private equity firms?
The SBTi’s work with private equity has its roots in the Initiative Climat International. Established in 2015, this was initially a project led by a group of French funds, which gained the support of France Invest and was then endorsed by the PRI.
The aim was to gather private equity firms together – first in France and then internationally – to work on climate risk within the investment process, establishing how to measure carbon emissions in the industry and how to set targets. It is a platform that helps firms collaborate, discuss topics, and share and promote best practice.
The firms involved in iCI formed the basis for the working group with the SBTi to help set robust and validated targets for private equity firms. It is a massive step forward. We had already been discussing carbon emissions and working with our portfolio companies on this for three years.
We wanted to set targets that were ambitious and credible, but there had been no guidance about how to do this in the context of a portfolio, where companies join and exit on an ongoing basis.
What do you want to achieve by committing to the SBTs?
The main aim is to achieve net zero in our firm and our portfolio companies. SBTs are the perfect tool for determining a path to reducing emissions and making sure those targets are in line with the drive to keep global warming to well below 1.5C, as set out in the Paris Agreement.
The SBTs have very clear rules and processes and they are not just about target setting. They also require that targets are validated and performance is audited annually. They ensure our ambitions are aligned with what each sector needs to do to reduce emissions to meet the Paris Agreement goals.
It is also about creating long-term change and impact. We run simulations of what the target should look like for each company, since every business is unique. That allows us to devise a reduction plan and set long-term targets for either 2030 or 2040. These companies won’t be in our portfolio then, but we believe that setting these companies on the right path is our responsibility as investors.
Why do you see this as your responsibility?
We are active owners of our portfolio companies. We want to leave them as better companies, with employees who are better off – both of which have societal benefits. Our responsibility as active owners is to prepare companies for what comes next, and that includes climate change.
We assess climate risk for every company annually to determine which ones will be affected by climate-related issues, such as carbon pricing or extreme weather events. We also believe this brings value at exit.
We are already seeing many more private equity firms starting to set SBTs and, over time, they will want to see that these are already in place at the target companies they pursue.
What is involved in implementing the SBTs?
There is no denying that it is a lot of work. We are around halfway there, so there is still a lot to do. At a firm level, we are running training for the deal team.
They need to know what the targets are about – they already know about carbon emissions, but the SBTs are much stricter than what we have had before and they are a new philosophy. The deal team needs to know what they entail both when we first invest in a business and then as we monitor progress through the life of our investment.
We are also offering our portfolio companies guidance around how to implement reduction measures and around the validation process. Our target companies are aware that this is a commitment that we have made because we ask about SBTs before we make a binding offer. SBTs also need to be in the shareholder agreement.
Companies must commit to collecting carbon emissions data as soon as possible and then this needs to be validated within two years – that is one of the rules. We agree the level of support we can provide to portfolio companies, which can include training and workshops.
What are the main challenges with implementing the SBTs?
The most difficult aspect of this is getting your arms around the indirect emissions. It is easy to establish things like a company’s electricity consumption and find ways of reducing this. But emissions from raw materials and stakeholders such as suppliers, for example, are much harder to collect and to set targets around.
One of our portfolio companies is currently looking at reducing the emissions from the plastic used to make medical supplies. To achieve this, you need to foresee what changes you need to make, what technology will be in place by 2030 and determine whether your customers will also accept your products – that is hard to do in a highly regulated sector like healthcare. You have to make a lot of assumptions and it takes commitment from a whole range of stakeholders.
What are the consequences of not meeting the targets?
The targets and performance are audited every year and you need to publish the results on your website, including whether you have met the targets or not. That can set you apart and help you differentiate yourself to LPs and prospective portfolio companies because you can demonstrate your expertise.
Yet, if you don’t hit the targets, your reputation is at stake. Even though, as I said, you have to make a lot of assumptions, you cannot just make an excuse that the technology you expected didn’t materialise, for example, because there are so many other factors at play and so many areas you can work on.
It is also worth noting that organisations are at different stages of maturity in this, so getting to the point of achieving the SBTs will take time for some firms. Some are only just starting out, while others have been doing this for a while and so there is experience that can be shared.
What we are setting out to do is beyond what we had originally expected. At the beginning, none of us thought that we would commit to the SBTs for every single portfolio company. Yet the fact that these are long-term commitments means that the less mature firms will have time to catch up before 2030. It may be more disruptive for them, but the decision to commit has come from the top – that means change should happen quickly.
How do you see climate action-related practice in private equity developing over the coming years?
The SBTs are important because they will drive measurable improvements. There will be a domino effect as firms use them to differentiate themselves and increase the value of their portfolio companies. Society is moving in the direction of the Paris Agreement goals and everyone, including customers and investors, is now asking for more data on carbon emissions.
LPs are also demanding change – they are supportive of the SBTs because they want to see real, measurable targets because they are also seeking to achieve net zero. When I speak to LPs today, they ask how we are engaging on climate change; just two years ago, they were asking what our ESG process looked like. That is a big shift.
That shift is seen throughout society and the private equity industry. There is so much awareness about this now and there is pressure for action from investors, policymakers, and as a result of the EU taxonomy.
When I joined the industry four years ago, there was very little carbon emissions measurement, but we have seen so many initiatives in the past year, in particular around net zero, that it is clear there will be substantial change over the next few years.
How did your firm’s work around climate action start?
I joined Astorg four years ago from Sony, which had made commitments on carbon emission reduction a decade ago – corporates, especially listed ones, were already there. So, when I came into the industry, I could see there was quite a lot of work to do. We wanted to improve our portfolio companies’ environmental performance and the start of that was to measure carbon emissions. That takes time to build, but it must be your starting point.
At Astorg, we started by assessing the carbon footprint of all our portfolio companies, which was quite unusual at the time. It takes a while to reach maturity because you need to ensure you have the tools in place to collect all the information not just on a portfolio company, but also on its suppliers.
Most of our portfolio companies start out by hiring people externally to do this, but they often then learn to do it themselves and that drives improvements in the data. So, it is only now that we have data that is good enough to apply the SBTs. High-quality data is vital.