This article was first published in the Financial Times.
The impacts of climate change are apparent. Hazardous weather events and their human and economic costs are regularly splashed across media headlines. The Intergovernmental Panel on Climate Changerecently indicated that, whilst the 1.5°C limit is still feasible, critical action across all sectors and levels is urgently required.
The UK Government believes that‘private investment will be crucial to delivering net zero, building climate resilience and supporting nature’s recovery’. Indeed, it is estimated that UK’s net zero ambitions will require £50-£60 billion more capital investment each year by the late 2020s and 2030s. Private capital has an important role to play in the transition to a greener future and helping plug this evident investment gap.
As either majority or significant minority owners, principally of unlisted, fast-growing SMEs (which account for 90% of BVCA member firms’ AUM), private capital funds are well-placed to drive transition in areas of the economy that public markets cannot reach.
Private capital is well-known for scaling young companies, which often provide the technological innovations needed to combat climate change. But the industry’s ‘active ownership’ model also allows it to help SMEs across sectors to embed environmental considerations and reduce the emissions intensity of their operations.
Private capital firms also have a strong commercial incentive to enhance the sustainability of any investee company, to reduce risk and create value for investors. With multi-year holding periods, they need to consider how the increasingly apparent impacts of climate change will affect those investments several years into the future.
If private capital is to fulfil its potential in supporting Government ambitions, a consistent policy framework and supportive investment climate is required.TCFD Framework & Private Capital
Launched by the Financial Stability Board in 2017, the TCFD framework has become an important standard for climate-related financial disclosures. While voluntarily adopted by an increasing number of corporates, firms and investors, it also underpins regulatory climate reporting rules for larger companies and asset managers in the UK and is influencing regulation in other jurisdictions.
Although the TCFD has published guidance for asset managers, this does not consider the specificities of private capital, and a degree of ‘translation’ is required for them to apply TCFD effectively to closed-ended funds holding portfolios of unlisted SMEs.
This is why the BVCA, and Initiative Climat International(iCI), a global initiative of private market investors focussed on climate change, partnered with KPMG to publish a practical guide to TCFD reporting for private capital firms.How it Works
TheTCFD Implementation Considerations for Private Equityillustrates how the private capital industry is coming together to develop best practice around the ESG challenges it is facing.
As a practical guide, it helps private capital firms use TCFD reporting to advance their consideration of climate risk and opportunity. Written by industry, for industry, it provides practical tools and data sources that reflect the specific features of private capital funds.
Based on current best practices, it uses information gathered through interviews with key stakeholders, from the private capital industry, business partners, and academia, and is supported by practical case studies.
It takes a banded approach to each TCFD pillar, reflecting different firms’ characteristics and priorities, depending on their size, structure, and reporting requirements, and provides specific guidance in three key areas: scenario analysis, metrics and targets, and valuations.
User feedback has been positive, with industry professionals appreciating the practical nature of the guide, and how it helps standardise approaches across the asset class.What is next?
As part of continued collaboration efforts across the industry, iCI’s next practical publication, expected later this year, will create a decarbonisation road map for private capital. Like the TCFD guide, it will provide practical considerations relevant for private capital funds.
More broadly, a global sustainability disclosure language is needed to support capital markets. The private capital industry is international, investing and operating across borders. Convergence around disclosure language (such as the recently released ISSB standards) will enable consistent and comparable reporting across businesses, supporting capital markets internationally. Global co-operation and co-ordination between different jurisdictions are essential for this to happen. This is why deep, established cross-border partnerships like that shared by the UK and Guernsey are critical and valued by the industry.
‘The partnership between us really matters. It’s about the predictability of what we hear, the ease of doing business, that is a good calling card, as well as the pool of experience on our doorstep.’Michael Moore, Chief Executive BVCA.
Harriet Assem was a panellist at Guernsey Finance’s Sustainable Finance Week, held in Guernsey 18th – 22nd September 2023.
