The role of private equity in driving sustainable investments is vital in the race to mitigate climate change.

There is a possibility that by 2030 eleven high-potential value pools may generate annual revenues exceeding $12 trillion in the global transition to net-zero. According to McKinsey & Company, these include sectors such as industrials, power, and transportation. Over the past year, Private Equity International (PEI) published lists of the largest LPs (Limited Partners) and GPs (General Partners) for 2022 as ranked by AUM. Our analysis of these key players sheds light on the industry’s mixed commitments to addressing climate challenges. The figures reveal a stark contrast in the level of climate ambition between GPs and LPs, raising important questions about the true impact of private equity in this evolving space.  

GPs: Falling Short of the Climate Mark? 

Despite the urgency to combat climate change, only 27% of the top 25 GPs have explicitly set climate goals on portfolio emissions reductions. This figure falls dismally short of the pressing need for decisive climate action. While 36% have climate funds, indicating some level of commitment, most of these funds only focus on renewables and green technology. Only 32% of these funds are investing in ‘grey-to-green’ assets – that is, allocating capital to sectors that are currently carbon-intensive (grey) but are trying to reduce their emissions over time to operate sustainably in the long term (green). Funding the grey-to-green transition is a crucial component of real-world decarbonization.  

More urgency is needed. Only 16% of the largest 25 GPs have established 2030 (or sooner) portfolio emissions reduction targets. Similarly, a meager 24% have committed to net-zero portfolio emissions reductions by 2050 or earlier.  

This begs the question: are GPs truly aligning their investment strategies with the urgent climate goals outlined in international agreements?  

LPs: The Real Climate Champions? 

The analysis reveals a more encouraging trend among the largest 25 LPs. An impressive 60% have set portfolio net-zero goals, demonstrating a stronger climate commitment. Moreover, 56% of LPs have targeted net-zero portfolio emissions reductions by 2050 or earlier, while 44% have set 2030 (or sooner) emissions reduction targets. These figures suggest that LPs are taking the lead in driving climate-conscious investments. 

However, it is important to note that while LPs are setting ambitious goals, only 28% have explicitly detailed a grey-to-green investment philosophy. This raises concerns about the robustness of their climate strategies as decarbonizing high-emitting assets is a key component of funding the climate transition.  

The Imperative for Strategic Action in Private Equity  

While some LPs show commendable ambition in their climate commitments, there is an urgent need for greater alignment across the entire private equity industry. In addition, transforming high-carbon assets is a significant investment opportunity that can generate long-term value and is vital to real-world decarbonization. 

Private equity plays a significant role in shaping economies and industries, and it must use its influence to accelerate the transition to a low-carbon future. 

This analysis of the largest 25 LPs and GPs reveals a striking disparity in their climate commitments. LPs, by setting ambitious goals, are demonstrating their understanding of the pressing climate challenges while also recognizing the long-term value in these types of investments. However, top GPs lag behind in adopting comprehensive climate targets and strategies. Both LPs and GPs must engage one another in a combined effort to contribute to real-world decarbonization or else risk missing out on a prized opportunity for market-level returns and elevated corporate leadership. This requires increased ambition, clearer investment philosophies, proper incentives, and decisive action to address the vital climate goals that our planet demands. The time for private equity to lead the charge in decarbonizing the real economy is now.  


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