Implementing the TCFD recommendations
Private equity GPs need a robust framework to assess climate-related risk and to help guide them through the transition.
This guide sets out the actions that private equity general partners (GPs) can take to address the four-pillar framework of the recommendations proposed by the Task Force on Climate-related Financial Disclosures (TCFD).
The PRI and INDEFI co-authored this guidance based on interviews with GPs, LPs and Service Providers. It includes examples of current practices of GPs who are at different stages of developing a strategy to address climate-related risk.
The guide also highlights practical resources that are available to support GPs in assessing the materiality of climate risk within a portfolio and how to conduct scenario analysis for holding companies.
What are the key drivers?
Climate change is an increasingly material risk for private equity investors.
- Portfolio companies face impacts from the physical effects of climate change
- Regulatory actions designed to reduce greenhouse gas emissions
- Partner (LP) investors are expecting GPs to report on their approach to addressing climate-related risk
What are the key barriers?
GPs cited a number of barriers to assessing and reporting on climate-related risk which this guide seeks to address, these challenges include:
- A lack of climate-related knowledge within investment teams
- Constrained resources and capacity limitations
- Difficulty in obtaining climate-related data and identifying metrics
- The scale of addressing climate change for an entire portfolio
What are the priority actions for GPs?
The guide addresses each pillar of the TCFD in turn and outlines a series of priority actions for GPs.
- Raise climate awareness throughout the organisation
- Conduct training for partners, investment directors and analysts
- Participate in cross industry workshops on climate integration
- Develop a governance system to manage climate-related risks
- Define climate assessment and management responsibilities at the board and management level
- Develop a simplified implementation plan
- Identify macro-level risks and opportunities through sector and scenario analysis
- Define an implementation plan
Risk Management and Metrics & Targets
- Conduct materiality analysis on current portfolio holdings to identify climate risk exposure and define key climate performance indicators for each portfolio holding
- Introduce climate risk as a factor in pre-acquisition due diligence
- Identify portfolio holdings with the highest exposure and conduct in-depth
- Fully integrate climate risk into investment processes
Support holdings with the tools and guidance to address climate risk
- Integrate climate risks that may affect valuations based on material climate indicators following different scenarios
- When material risks are identified, define climate targets at a portfolio level.
- Conduct an annual review of portfolio holdings to assess progress towards climate objectives
- Pre-acquisition and after climate due diligence, engage with least resilient companies.
PRI is grateful to Bloomberg Philanthropies for their support of this report.
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