In November, the Science Based Targets initiative published tailored guidance for the private equity industry to facilitate the adoption of science-based targets that align with the goals of the Paris Agreement.
Tim Clare, a director in transactions and ESG advisory at global sustainability activator Anthesis Group, was among the primary authors of the SBT guidance for private equity. Here, he outlines the steps secondaries firms can take to support climate initiatives and the SBTi agenda.
What are the challenges involved in setting science-based targets for secondaries?
The biggest challenge is that secondaries investors are typically at least one step removed from underlying investee companies, ie, assets. Since secondaries investors are not the GP responsible for managing the assets, their direct engagement with the underlying portfolio is necessarily restricted.
Similarly, these types of investors are typically at least one layer removed from monitoring and influencing portfolio company operations and do not control the timing or form of any exit process. Normally, secondaries investors will have more influence when making direct secondary or GP-led investments, as opposed to LP positions, which pose a greater challenge.
What guidance does the SBTi provide for secondaries firms?
The SBTi does not presently have a formal target method for secondaries firms. Secondaries firms are encouraged by the SBTi to set GP engagement targets (a percentage of GPs they will engage with) internally to promote climate initiatives and SBTs.
As a prerequisite to any engagement, the SBTi provides practical advice for carbon screening for all new investments and how to engage GPs with the SBTi agenda. Examples include screening for higher carbon-aware GPs in an investment opportunity, screening for higher carbon opportunities at the asset level within a portfolio opportunity, or raising relevant climate-related questions at due diligence.
How can secondaries firms engage with sponsors on climate initiatives?
Secondaries firms can engage GPs with the SBTi agenda via existing ESG avenues. These range from promoting the secondaries firm’s own ESG policy and approach, including on climate, to supporting GPs to develop their own ESG policies.
The guidance also recommends promoting or requiring SBTs within side letters, and delivering ESG workshops for GPs, including on climate-related topics. Other examples include monitoring GPs’ uptake of net-zero commitments or even undertaking joint visits to assets (where appropriate) and providing observations from the perspective of ESG (including on climate).
Is there scope for secondaries firms to track decarbonization efforts, like the SBTs, at the underlying asset level in the future?
Not easily. The best that a secondaries firm can do is continually record and consolidate the success of the engagement – for example, the number of GPs that have set SBTs due to secondaries-led climate workshops – and to track the success of the influence against the target set.
Even in instances where the secondaries firm is closer to the underlying assets, the secondary investment is at the end of investment stage where there is little influence to reinject the capital required to reduce emissions.
The greater opportunity tends to reside at the level of the underlying GP managing the assets and into whose funds secondaries firms might invest.