Are private companies ready for the climate transition?

Net-zero ambition and climate transition expectations in the public markets are driven by compliance needs and expectations from stakeholders such as investors, corporate customers, and industry alliances. As of 2024, around 8,300 companies have set net-zero commitments, while 675 financial institutions are part of the Glasgow Financial Alliance for Net Zero (GFANZ). Increasingly, data from environmental assessments and mitigation is cascading into private markets from corporate supply chains and financial institutions’ portfolio-management obligations.

Preqin data shows a steady increase in the number of ESG funds that raised and related aggregate capital allocation within the private markets. In 2023, there were almost 400 ESG funds with a record $224bn in capital allocation. A sizable 52% of these funds and related capital allocation was from Europe- and UK-domiciled LPs.

However, required ESG integration and related disclosures are lagging: 60% of fund managers reported ESG considerations in investment decisions, but less than 10% can report portfolio-level emissions.¹ Maturing disclosure regulations in different regions and sustainable finance implementation require reliable and standardized portfolio-financed emissions assessment and monitoring as a starting point.

Fortunately, there is an effective entry point for asset owners and fund managers, particularly private equity GPs, to leverage the economies of scale created within corporate supply chains and environmental efforts. With private companies making up more than half of the 23,500 companies that reported on their climate impacts through CDP in 2023, data indicates a foundation of awareness, action, and business opportunities to build on.

Global coverage in private company disclosures:

• The APAC region accounts for 40% of all private companies that reported through CDP in 2023, led entirely by supply chain engagement.²

• EMEA showcases the momentum built by regulation and accounts for another 40% of private company disclosers.

• Europe- and UK-domiciled investors are growing capital allocation to ESG funds and will require environmental disclosures to monitor and report in line with recent regulation such as the Corporate Sustainability Reporting Directive. Fund managers can leverage this momentum if they can engage or drive environmental integration across portfolios.

Going beyond emissions accounting:

• Scope 1 and 2 emissions were self-reported by over 70% of all private companies, with 40% of EMEA-based companies also reporting on scope 3 emissions. Private companies are equipped with the basics of emissions accounting, with 77% of companies reporting on emissions in their first year of CDP disclosure.

• There is a visible implementation gap on transition management as only 50% of companies report having set emission reduction targets.

• Fund managers are well-equipped to shift the focus from data collection to data integration to transition to a sustainable business.

We invite LPs and fund managers to be part of a global solution and take advantage of standardized and decision-dependent data – not only to meet compliance requirements, but to proactively create business opportunities and attract environmentally responsible capital.

_{1 From CDP’s analysis of Preqin data, 2023
2 CDP's 2023 Corporate Response Dataset – Climate Change}

About
Radhika Mehrotra is responsible for driving financial institutions’ interactions with CDP data to inform their investment and procurement decisions towards a zero carbon, sustainable economy. She is also leading the development of a disclosure and data solution for private market investors. Visit cdp.net to find out more.

_{This article originally appeared in ESG in Alternatives 2024. The opinions and facts included in the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin and CDP accept no liability for any decisions taken in relation to the above.}