General partners are lagging when it comes to understanding and mitigating the climate risk of their portfolios, according to Coller Capital‘s head of ESG & sustainability.
Adam Black was speaking at the launch of the secondaries firm’s annual ESG report in mid- October, which revealed that just 41 percent of GPs have firm-level ESG policies related to climate change, compared with 91 percent for cybersecurity and 90 percent for financial crime.
Almost half of the GPs said their portfolio companies are adopting climate-related ESG policies, compared with 84 percent for cybersecurity and 78 percent for financial crime.
Private equity firms should be wary of rectifying this via a standardised approach, Black said. While regimes such as the UN-backed Principles for Responsible Investment are a useful guide for which factors need to be considered, there is no substitute for detailed portfolio company analysis.
“On ESG due diligence, there’s a danger that you’ll tick a box and follow the standard rather than actually delivering,” Black said. “If you’ve got an ESG policy or are a PRI signatory, great. But I’m still going to ask you the same questions about your portfolio.”
Black concedes that this is easier to do with GP-led deals or secondary directs than portfolios. Coller will often take a representative sample – such as the companies in a portfolio with the largest exposures by net asset value – and produce a risk-adjusted picture of ESG risk.
There have been approximately 16 instances in which ESG was a deciding factor in a deal not going ahead or an asset being carved out of a portfolio, Black said.
Coller has been offsetting its own carbon footprint in recent years via forest regeneration, Black said. The firm is preparing to carry out scenario analysis on its underlying holdings to model the potential impacts of climate change. Black hopes this can provide a template for other fund managers to follow.
“When assessing sustainability businesses, [you] need to ask questions such as what will your product or service look like in 10 or 20 years’ time?” he said “Are you going to be able to sell the business in five years? Are there raw materials or processes that are particularly hazardous or likely to be banned or restricted? We need to see more focus on the life-cycle assessment of products and services, not just compliance at a firm level.”