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.

Governance

  1. Raise climate awareness throughout the organisation
    • Conduct training for partners, investment directors and analysts
    • Participate in cross industry workshops on climate integration
  1. Develop a governance system to manage climate-related risks
    • Define climate assessment and management responsibilities at the board and management level

Strategy

  1. 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

  1. 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
  1. 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.
  1. 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.

Figure A

PRI is grateful to Bloomberg Philanthropies for their support of this report.

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