Aligning private equity portfolios with net-zero

Both privately and publicly held companies in countries that have set strict targets for reducing carbon emissions face comparable levels of climate-transition risk, an analysis by MSCI ESG Research shows.

The private companies examined tended to have lower exposure to carbon-intensive sectors such as energy, materials and utilities than listed companies. But the difference in carbon intensity between public and private companies narrowed by roughly 85% in countries that have set stringent standards, according to the analysis, which compared the Scope 1 and 2 emissions of nearly 19,000 private companies with those of the nearly 9,300 listed companies in the MSCI ACWI Investable Market Index (IMI).

The importance of measuring the carbon footprint of private equity portfolios has become more pressing as institutional investors increase their investments in private equity and other unlisted assets. Private equity, real estate and infrastructure account make up for than 26% of global pension portfolios, up from 7% two decades ago, according to the latest annual study of global pension assets by Willis Towers Watson.

“This means that both private and public companies are similarly vulnerable to regulations and policies aimed at reducing companies’ direct emissions,” writes Manish Shakdwipee, head of climate change research for MSCI ESG Research. “The problem then becomes one of attention: Since private companies face fewer disclosure requirements, the market has paid less attention to their emissions.”

“As allocations to private assets increase, the importance of addressing these exposures grows,” he adds.

Though the private portfolios studied contained less exposure to carbon-intensive sectors than public portfolios, emissions within the private portfolios tended to be concentrated in fewer companies, the analysis shows.

The top 50 emitters among the private companies examined by MSCI accounted for nearly two-thirds (63.6%) of emissions in that group, while the top 50 emitters among the world’s listed companies made up roughly 40% of  carbon emissions in that universe, the analysis found.

The more concentrated emissions in private portfolios mean that investors who choose to engage private companies with respect to climate change “would have to engage fewer private high emitters than they would with their publicly held counterparts to address a similar level of carbon emissions,” Mr. Shakdwipee notes.

The analysis, which notes that investors have been slow to act on the climate-transition risk in their private portfolios, suggests that investors ask unlisted portfolio companies for more comprehensive disclosures on climate-related financial impacts.

Understanding Carbon Exposure in Private Assets. A look by MSCI ESG Research at how investors in private assets can assess their exposure to carbon emitters in their portfolios, and what can they do about it.

The Changing Climate for Private Equity. A report by the environmental group Ceres on the direction of the private equity sector with respect to climate change.

TCFD for private equity general partners: technical guide. Actions that private equity general partners (GPs) can take to address the TCFD framework, together with practical resources that are available to support GPs in conducting scenario analysis and assessing the materiality of climate risk within portfolios.