Shades of green

Caterina Romanelli, responsible investment and ESG manager at PAI Partners, tells us what the firm learnt from its ‘PAI Carbon Project’.

In our view, carbon emissions and climate risk are amongst today’s biggest and most tangible ESG challenges. The Paris conference on climate COP21 marked a turning point in the world’s commitment to address climate change and with global action on this important issue accelerating, PAI has responded by setting up a full carbon impact audit, the ‘PAI Carbon Project’. We believe PAI is the first private equity firm to have carried out such an exercise.

The PAI Carbon Project measures the real influence of our portfolio on its environment so that we can steer action plans in the right direction. In order to do this, we used an established methodology to assess risk and identify opportunities in a more structured fashion.

The methodology is based on bottom-up analysis of each portfolio constituent, using tailor-made data collection, derived from sector specific indicators and calculation models. It involves a carbon-footprint review, which looks not only at direct emissions and those associated with the electricity used by each company, but also calculates emissions from a company’s value chain. The methodology also includes a calculation that addresses the emissions associated with the goods and services consumed by the portfolio companies, and those associated with the use of the products they supply.

As well as the quantitative calculations, we developed three qualitative indicators to apply to our portfolio. We carried out an evaluation of the degree of risk and opportunity faced by each company in the context of low-carbon transition, based on the sector in which it operates. We also completed an assessment of the companies’ readiness to contribute to climate change mitigation, and reviewed the reporting quality and transparency of the companies’ disclosure of emissions and climate-related data.

Our review concluded that the portfolio is responsible for the equivalent of 65 tonnes of CO2 each year for each €1 million invested by PAI. It also found that the portfolio’s direct emissions only account for around a quarter of its carbon footprint, with the majority found in company value chains.

The project has been thoroughly informative in showing the differing climate performance across the portfolio and we are proud to say that there have been several examples of environmental best practice at our portfolio companies. Labeyrie, for example, has chosen to support a waste-to-energy project to help reduce its carbon footprint and produce carbon-neutral power.

We have received extremely positive feedback from portfolio companies, who have appreciated the insights into their businesses and their relation to climate risk and opportunity. 

Looking to the future, we have found that portfolio companies can typically deliver emissions reductions through three specific types of actions: purchasing recycled materials, investing in energy efficiency improvements, and recycling waste. Thanks to emission reductions savings, every €1 million invested by PAI has led to an annual emissions reduction of 250kg reduction in CO2e, or carbon dioxide equivalent. 

The challenge PAI faces, as we continue to develop our ESG initiatives, is that it is not yet possible to benchmark the carbon intensity of the PAI portfolio against those of our peers. However, this project allows us to work with portfolio companies to help them understand the climate risks and opportunities they face, and incorporate climate change into business planning. We are also confident that this will enable us to better present PAI’s approach to climate risk and our contribution to finding solutions, as interest in the issue grows among investors and wider stakeholders.