Institutional investors raise the bar on climate change

Earlier this week, the Institutional Investors Group on Climate Change (IIGCC), a body comprised of 50 European limited partners, launched a guide raising awareness among the private equity community of climate change issues.

The launch comes a few months after the UN’s Principles of Responsible Investment (PRI) were published,  a set of guidelines that address environmental, social and governance (ESG) issues from a wider perspective.

“The PRI guide issued last year does not provide detailed questions on climate change, which is what the IIGCC guide does, making the two publications very much complementary. Both look at the process for understanding and managing the risks and opportunities - one on ESG generally, the other specifically on climate change,” comments David Russell of the Universities Superannuation Scheme, one of the investors forming the IIGCC and signatory to the PRI.

The initiatives are therefore not simply a public relations strategy. The real message is: if you want to be treated like a mainstream asset class (and if you want to remain a mainstream asset class) then start acting like one. In this sense, both the EVCA and the BVCA have welcomed the initiative.

Indeed, the guide’s main purpose is to mitigate climate change risks. The hope is that LPs will use this guide as a basis for a discussion with their GPs. “The guide has been written to raise awareness amongst pension fund trustees and LPs generally of the risks and opportunities posed by climate change for the private equity sector. It sets out guidance for LPs and their advisers on the types of questions they should consider asking in order to understand the cost of carbon on their investments,” notes Russell.

From the GP perspective, the initiative appears to be well received. “We believe this to be a positive development. The IIGCC guide helps to generate engagement which is what our industry needs most right now when it comes to climate change”, notes Carl Nauckhoff, principal of private equity firm Investindustrial, also a signatory to the PRI and the UN Global Compact.

Similarly, from an investors’ point of view, the initiative ensures that the value of portfolio companies remains intact in light of ESG issues, potentially even increasing their worth during the holding period and upon exit. Nauckhoff concurs: “For any GP looking to attract capital from global institutional investors, ESG issues are really important. It is not about looking good but rather about understanding the underlying fiduciary duties of LPs.”

The IIGCC guide encourages a pro-active approach among asset owners/managers, particularly in view of new climate change regulation coming into effect, such as the UK's mandatory CRC Energy Efficiency Scheme (formerly the Carbon Reduction Commitment) due to start in April this year.

One way or another, the implications of climate change are moving higher up on the investment agenda – and it seems as though it is a win-win situation for all those involved.

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