Suzanne Tavill, global head of responsible investment at StepStone Group,
says the most effective way to manage and reduce the carbon emissions of a
private capital business is to first take a broad, strategic view enabled
by conducting a carbon footprint. “Starting with the carbon footprint
allows the organisation to map a path forward. Then the next logical step
is to start some initiatives and move to setting targets.”
ESG issues, including greenhouse gas emissions (GHG), are increasingly
important as private equity firms compete for capital and as investors push
for improved disclosure. Entrepreneurs also often prefer to work with firms
that share the same values, sometimes making it a clincher in attracting
and retaining talent. And, companies seeking private capital are
increasingly led by young executives who screen potential backers for their
ESG values.
We believe StepStone is in a position to influence a considerable number of
ventures, because it operates in 12 countries, has $US109 billion under
management and employs more than 740 people as of November, 2021. They
cover not just private equity but also private debt, infrastructure, real
estate and venture capital. Tight processes and policies are adopted within
the business to reduce its carbon footprint, but it is not able to
eliminate all emissions. So, it looks at offsets to achieve a net GHG
neutral position.
“Regarding our business travel, we are a global organisation and much
travel is non-discretionary. But this COVID period has shown us that there
are meetings that don’t need to be done in-person, and so we will need to
be vigilant as travel resumes about what becomes the “new-normal”. We are
focused on maintaining the high quality of our due diligence work and as
such face-to-face meetings have a place. Similarly, with clients,
particularly in new client relationships, face to face discussions are
advantageous,” Suzanne explains. “Fortunately we have 21 offices which
assists in these efforts without incurring travel.”
“Across the industry we have seen AGMs and limited partner advisory
committee meetings moving to a hybrid format which seems to be an effective
and efficient solution. Similarly, some GPs have adopted virtual or hybrid
due diligence sessions for fundraising which also is helpful for many LPs”
The private capital sector is making commitments around Net Zero.
Disclosure requirements (like the TCFD) and regulation are powerful in
driving this focus. For portfolio companies, StepStone recognises the
varied business models and very different starting point of each businesses
and so “We try to direct them towards conducting a carbon footprint and
setting up a climate change policy,” Suzanne says. “We find that if they
start with a baseline, they establish a more holistic view of what’s going
on in their organisation. It could be travel, or it could be energy
consumption or something dependent on the type of assets they own. There
are an increased number of best practise frameworks out there including
SBTI and guidance by initiative Climat International for GPs on how to set
best practise targets and reporting for their portfolio companies. While
this may be leading edge today, tomorrow it is going to be standard
reporting if we have any hope of getting temperature rise down to 1.5
degrees.”
When queried on whether there is resistance to adoption of such practises,
Suzanne explains that “one has to make the argument (to staff within your
own organisation or your management team within portfolio companies) why a
focus on climate change and GHG emissions makes good business sense.
Showing the link to value accretion is important.” Also, Suzanne notes that
“more and more asset owners have adopted climate change policies and net
zero commitments, and as such GPs will be facing ever increasing engagement
from LPs querying about these practises. Remember, that LPs need GPs to
produce carbon footprinting on their portfolio holdings to enable LPs to
complete their own carbon footprint reporting. Private capital with its
longer holding periods and operationally-focused toolkit is well positioned
to drive change around decarbonising our economies. Investment managers in
particular have the ability to influence the companies they invest in. So
advocacy through the entire ownership chain can be incredibly powerful”.