In February of this year, private equity multinational The Carlyle Group publicly committed to hitting net zero greenhouse gas emissions by 2050 across its entire portfolio. The commitment makes much sense; private equity and venture capital firms are ideally suited to lead the charge towards net zero. Unlike their public market asset management peers, they are more directly involved in their portfolio companies, often holding board seats, and therefore able to influence ESG strategy. Because their role is to help their companies grow, we believe it is imperative for private capital firms to build carbon accounting into the DNA of their investments.
Transition risk: As portfolio companies grow, carbon accounting will become more unwieldy. Business operations will become more complex and likely involve a greater number of stakeholders. It will be far easier to account for emissions before this happens, and also minimize any transitional risk companies undergo during their growth phase and as they move from a high carbon to a low carbon life cycle.
Reputational Risk: If a company is perceived to disregard the environment or greenwash its operations, the power of technology and social media swiftly amplifies this news. Millennial and Generation Z consumers are more conscientious than their forebears. Deloitte’s Global Millennial Survey 2021 found climate change and environmental protection to be their number one concern, with 60% of respondents disbelieving promises by the business community to prioritise either. These generations are willing to take a pay cut to work for environmentally responsible companies.
Regulatory Risk: The United States Securities and Exchange Commission (SEC) has proposed rules requiring publicly traded companies to disclose climate-related financial information. It is fair to assume that eventually this information will have to be disclosed for private companies as well. In Canada, federally regulated financial institutions must report climate data in line with the Taskforce on Climate-Related Financial Disclosures (TCFD) from 2024 onwards.
Carbon offsets, already a controversial market, are hard to estimate and costly to audit. Nor are they entirely accurate, making it difficult to assess whether one is buying enough credits to offset emissions. Portfolio companies can save themselves this hassle by embedding a low carbon culture into the very foundations of their operations.
artnership for Carbon Accounting Financials (PCAF)
Launched in 2019, PCAF is a global partnership of financial institutions that aims to standardize the data collection, assessment and reporting of greenhouse gas emissions associated with their loans and investments i.e., their financed emissions.
The PCAF standard is ideal to implement because it comes from within the industry itself. Rather than reinvent the wheel, its recommendations and requirements complement existing frameworks such as TCFD, the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB). Some prominent North American PCAF members include Bank of America, BlackRock, CIBC, Bank of Montreal, FinDev Canada, Citi Group and Morgan Stanley. In November 2021, the London (UK)-based BC Partners became the first private equity firm to join the partnership.
Without automation, PCAF becomes yet another (necessary) reporting burden that companies have to contend with. Through cloud-based automation, companies can simplify the process by inputting basic carbon-related information and generating automatic reports for limited partners and other stakeholders. ESGTree is currently working with Canadian banks to automate their PCAF data.
But getting that information isn’t always easy. Carbon emissions are hard to calculate and usually require the engagement of consultants to appraise an organization’s Scope 1, 2, and 3 emissions – a process both costly and time consuming
Scope 1: Greenhouse gas (GHG) emissions produced by operations that are directly controlled or owned by the reporting company
Scope 2: GHG emissions produced indirectly from the reporting company’s outside purchase of necessities such as electricity, heating or cooling
Scope 3: Indirect GHG emissions resulting from the supply chain of the reporting company
ESGTree’s Carbon Calculator was devised to do away with this encumbrance. Now staff members themselves can generate these figures using basic information about company operations. Our clients have reported a 70% reduction in the time it takes to calculate this information.
When it comes to carbon accounting, Benjamin Franklin’s old adage proves doubly sound: don’t put off until tomorrow what you can do today. Don’t listen to Oscar Wilde on this one.