Emissions reporting standards and practices in the private equity sector have been described by certain commentators as being some way behind those in the public markets; certainly the private equity asset class has, so far, received less attention in the context of Environmental, Social and Governance (ESG)-related reporting developments more generally. That is changing, however; General Partners (“GPs“) are increasingly called upon to disclose climate-related data and establish greenhouse gas (“GHG“) emissions reduction targets across their portfolios.
There is not, at present, an agreed standard for reporting such information at a fund level, which has resulted in inconsistent approaches being adopted by different funds. Inconsistencies, of course, potentially impair the ability of investors to make meaningful comparisons between portfolio companies, and indeed between funds.
In an attempt to address this inconsistency, the Initiative Climat International (“ICI“) — a practitioner-led group of private equity funds and investors that represents over USD $3 trillion in assets under management — in partnership with sustainability consultancy group Environmental Resources Management (“ERM“), have taken the proactive step of launching a new, non-binding standard that sets out a consistent approach to GHG disclosure across the private equity sector. The standard, outlined in the ICI and ERM’s Greenhouse Gas Accounting and Reporting report (the “Report”), aims to better align the disclosure practices of private equity funds with the practices currently adopted by many listed companies in the public markets.
GHG Accounting and Reporting Processes
The Report outlines a three-stage process for GPs to adopt when accounting and reporting their GHG emissions; the process is based on the principles of the widely-used GHG emissions accounting standards provider, the GHG Protocol, and the Global GHG Accounting and Reporting Standard, produced by the financial institution-focused emissions measurement and reporting organisation, the Partnership for Carbon Accounting Financials, namely:
- Calculating the Scope 1, 2 and 3 GHG emissions for GPs and for each portfolio company – the Report provides guidance on how to: (a) choose appropriate organisational, operation and temporal reporting boundaries; (b) identify GHG emissions sources; (c) collect source data; (d) select appropriate emissions factors; and (e) calculate GHG emissions;
- Calculating financed GHG emissions (i.e. emissions associated with portfolio companies), and attributing this data from portfolios to GPs and LPs – the Report provides three options for calculating financed GHG emissions (and associated advice on when to use each option): (a) reported emissions; (b) physical activity-based emissions; and (c) economic activity-based emissions; and
- Aggregating GHG emissions at a fund level and reporting this to stakeholders and/or the public – the Report provides guidance on what GP reporting should cover in respect of: (a) public disclosures; and (b) reporting to stakeholders.
It is hoped that following this three-stage process (and the associated guidance) will enable GPs, irrespective of their jurisdiction, to establish consistent processes for GHG emissions data collection and calculation, thereby improving the quality of their GHG emissions reporting, whilst also providing a path to strategic portfolio analysis and target-setting to support the transition to a net zero economy.
The focus on private equity to improve the transparency of its climate credentials – along with private equity’s ambitions to be cognisant of that and embrace and assist with delivering change – is a trend we expect to continue.