Managers need to demonstrate active management of climate change risks by, for instance, incorporating them into business models and developing ways to comply with emissions reduction requirements, according to a new guide from the Institutional Investors Group on Climate Change (IIGCC).
“Climate change risk and opportunity assessment is a value-creating proposition for investors,” the IIGCC said in its latest Guide on Climate Change for Private Equity Investors. “Investment strategies that do not adequately consider the implications of climate change may be exposed to additional risks.”
The guide, targeted at GPs, LPs and advisors and prepared with Principals for Responsible Investment and KPMG, was launched at the PEI Responsible Investment Forum held with PRI this week in London.
It follows on the heels of the 2015 Paris Climate Agreement, which set a new cap on global warming at below two degrees Celsius and promises to herald new global and national regulations.
“There is new evidence on climate risk but also the technological solutions that will become part of a low-carbon future and will need to be financed through private equity investment have advanced significantly,” IIGCC chief executive Stephanie Pfeifer said in the introduction to the guide.
The guide lists climate change risks including stranded assets, an inability to properly insure operations, restricted access to vital resources, and rising legal and compliance costs.
“Although there is risk, there is also opportunity and forward-thinking GPs to leverage the upsides by applying a ‘climate change lens’ to their investments as a means of generating revenue and cost savings,” the guide said.
Among its recommendations, the guide outlines a framework both LPs and GPs can use during due diligence, including questions LPs can ask GPs and GPs can put to portfolio companies regarding their carbon footprint. It also includes examples of emerging best practice.
Firms will also have to navigate an increasing amount of regulations impacting private equity investments, including the French energy transition law, the G20’s Task Force on Climate-Related Financial Disclosures and the Sustainable Stock Exchanges initiative, the guide said.