By investing in earlier-stage companies and having controlling ownership, private equity has the potential to tackle ESG considerations effectively, according to Jennifer Signori, managing director, Neuberger Berman. Here, Signori discusses creating value, engaging with companies and calculating portfolios’ carbon footprints.
How does ESG create value within private equity?
Private equity investors are uniquely positioned to effect change, given they generally have controlling ownership of companies. This means private equity investors potentially have more ability to influence strategic and operational change – whether to tackle climate risks or other business challenges – than many public equity investors.
Historically, private equity’s focus on ESG has been weighted towards the ‘G’, through an emphasis on driving value and working closely with management teams to lead operational and strategic change. However, there is a growing focus on how social and environmental factors can be material to financial value. For example, the Covid-19 pandemic highlighted the need for responsible supply chain management, business continuity planning and timely management of employee health and safety.
From an environmental standpoint, the physical risks from climate change are already materialising, with greater prevalence and severity of extreme weather events being felt around the globe. Real economic value is at stake, so adaptation and mitigation plans are necessary.
How can private equity tackle climate change?
Private equity firms are well-positioned to invest in companies developing targeted climate products or services, which are often run by smaller or earlier-stage companies, and to help those business scale and become mainstream.
A serious impediment to measuring the effectiveness of this change is the lack of climate data across the industry. Most private companies are not currently doing carbon footprint assessments, which makes it difficult for private equity managers to measure the carbon footprint of their portfolio and set emissions reduction targets.
Because of this, private equity managers and investors often rely on top-down emissions estimates, based on proxies, to understand their financed emissions.
Given the data challenges, private equity managers are still in the early stages of committing to net zero. For example, only a handful of firms have emissions reduction targets that are validated by the World Resources Institute’s Science Based Targets initiative.
That said, initiatives such as the ESG Data Convergence Initiative, which brings together various private equity stakeholders, are encouraging greater disclosure of metrics. However, the impact will take time, due to the inevitable lag between private equity firms making commitments on new funds and investing the capital.
How do you engage with the industry and your managers on climate risk?
We participate in industry groups that aim to promote climate disclosure and analysis, including as a member of the Carbon Disclosure Project’s private equity technical working group, the Initiative Climat International net-zero working group, and the Net Zero Asset Managers Initiative.
Alongside this, we engage with our private equity managers on a variety of climate-related topics, and collect ESG Data Convergence Initiative metrics from our investees, where available.
How do you assess climate risk and opportunities within your investment process?
As a firm, Neuberger Berman supports the Task Force on Climate-related Financial Disclosure, and we are committed to understanding our climate-related risks and opportunities, while managing the risks that are material to our investment portfolios and our firm.
Within Neuberger Berman Private Equity, we screen potential investments for material ESG risks and collect carbon emissions data at the time of due diligence – to the extent it is reported by the company. As part of diligence, we may also conduct climate risk analysis for specific direct investments where climate risks – especially physical risk – may be more material. On an ongoing basis, we monitor investments for ESG issues as part of our dialogue with GPs. We also leverage a data analytics platform to track publicly available information that allows us to flag significant ESG-related issues.
Importantly, the sectors in which private equity tends to invest, such as the technology, consumer discretionary, and healthcare sectors, are usually less affected by climate costs. Typical private companies in a particular sector may also have lower climate costs than their public market counterparts. For example, in the energy and utilities sector, traditional utility companies are more likely to be public companies, whereas a private company in the same sector is more likely to be an asset-light business providing services to utility companies.
Can you tell us a little more about how you calculated the carbon footprint estimates for NBPE’s portfolio this year?
In 2021, we started collecting carbon footprint data on potential direct co-investments, and since 2022 we have been collecting Scope 1 and 2 emissions data from investees, where available, as part of the ESG Data Convergence Initiative. As this data is generally not readily reported, we developed a methodology for estimating carbon footprint information for private equity investments.
In 2022, we conducted the first top-down estimate of NB Private Equity Partners’ carbon footprint using third-party emissions data proxies – given the limited actual disclosure of private companies. Due to the inherent challenges of using estimations, we are continuing to refine this methodology. At the same time, we are exploring climate analysis tools and resources through pilot partnerships and industry collaborations.