How PE can plan for climate risk with confidence

As private equity (PE) firms focus on ESG, they must also pivot to a long-term, forward-thinking mindset.

For an industry accustomed to using historical data to project the next four to five years, this is no simple task; however, it is an existential one. Climate change will mean our world looks very different in a decade regardless of the action we take (or don’t take), and PE firms are uniquely equipped to lead this mission, should they choose to accept it.

ESG topics have both financial and commercial relevance, and PE must define and track KPIs that are specific to each portfolio company. It is no longer optional to engage in the ESG conversation, as a lack of awareness is an inherent business risk.

Two overarching climate scenarios are possible, both of which require comprehensive adaptation and imagination:

• A warming scenario in which rising temperatures impact access to raw materials, stoke political stability and disrupt value chains
• A transition scenario characterized by increasing regulation, bans and changes in technology and consumer preferences

Six ways PE firms can shift their mindset to increase their climate competence and confidence:

1. Champion a long-term, forward-looking perspective
2. Cross-pollinate climate data across workstreams
3. Incorporate climate scenarios as core data points
4. Engage diverse perspectives
5. Embrace complexity and curiosity
6. Verify competence on climate and environmental risks in investment teams

For your convenience, full text transcript of this podcast is also available. Read the transcript.