Private Capital and the Climate Opportunity in Europe
The atmosphere for climate and sustainability investments in Europe is improving. Private equity and venture capital players need a strong strategy to seize this opportunity.
As the race intensifies to achieve global net-zero emissions by 2050, BCG estimates that governments, industries, and investors will need to contribute between $100 trillion and $150 trillion to address climate change. To achieve that, private investors need better mechanisms to understand how to integrate carbon into investment decision making.
This has been a hard question to answer since, historically, carbon has not been consistently priced into asset valuations. Even so, many private market investors say carbon is already affecting their decisions. According to a survey of leaders in private markets by BCG and the Sustainable Markets Initiative’s Private Equity Task Force, about 70% report high or very high expectations they will earn a premium for a portfolio company that prioritizes decarbonization (see the exhibit), and about 65% have high or very high expectations they will be penalized if a portfolio company makes insufficient progress.
Given the need to more accurately price carbon into asset valuations, the Private Equity Task Force and BCG have developed voluntary best practices guidance—in alignment with established investment methodologies and current data environments—that private equity firms can consider as they take steps toward valuing carbon in the investment process. The framework includes four components that impact carbon-adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), and one that impacts exit multiples. The ones that matter most may vary by geography and sector.
That framework represents merely the start of a longer journey for private markets, and each firm will need to decide how to best incorporate carbon into its decision-making processes. Fortunately, early movers offer some important lessons for how others might begin this journey. For example:
Private markets need to take immediate steps to better understand how carbon affects valuations. The cost of inaction is ever increasing. Ideally, investors will consider the guidance we provide here, which offers a catalyst for action and a way to support firms as they embark on a long-term journey toward energy transition.
The authors would like to thank Adinah Shackleton, Head of ESG at Permira, who contributed to this article.
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