Going green is delicate, incentives-driven work – AVCJ Forum

Sophie Walker, head of sustainability for private capital at EQT, referred to her approach as “using a lot of carrots with the deal team rather than sticks.” This involves explicit requirements that investment professionals understand science-based emissions reduction targets as well as providing similar carbon literacy training at the portfolio level.

The idea also extends to linking the deal team’s carried interest to portfolio-level key performance indicators (KPIs).

EQT is testing this strategy with its recently launched Future Fund, an impact vehicle seeking EUR4 billion ($4.5 billion) for long-hold investments in mature companies. The KPIs connected to carried interest include emissions reductions, gender diversity, and the use of science-based methods to validate achievements in those areas.

At the portfolio company level, incentives to adopt sustainability protocols are a matter of finding where best practices translate most directly into business opportunities.

In terms of achieving emissions reduction targets, this means understanding where business opportunities intersect with the various categories of emissions measurement. They include scope-one and scope-two (direct emissions and emissions from purchased energy), and scope-three (tracking indirect emissions through the supply chain).

“It’s really important to drive the scope-one and scope-two reductions – the operational footprint – that you have. However small it feels to that CFO, that is your responsibility. But typically, most of our portfolio companies, 80-90%, even 97% of their carbon footprint will be in their scope-three,” Walker said.

“If you don’t tackle scope-three, then you’re not changing the system, you’re not driving it down through the supply chain, you’re not engaging with your customers, and you’re not taking accountability for the most material proportion of your emissions. I would at least expect a net-zero commitment to move faster on scope one and two, but defiantly having a scope three intention behind it.”

Purnima Gandhi, a vice president of Temasek International, described her firm’s approach as leading by example. Temasek has set an initial internal carbon price of $42 per ton of carbon dioxide equivalent with a view to encouraging portfolio companies to follow suit. It has pledged to halve the net carbon emissions of its portfolio compared to 2010 levels by 2030.

Gandhi said success in this area was significantly tied to engagement and the idea of making ESG-related measurements an intrinsic part of operations. For example, carbon targets and their related business objectives must be communicated in terms that are relevant not only to senior management but a company’s entire staff.

“Unless this percolates down from the CEO to the management team to the employees, getting scope-three will be a challenge,” Gandhi said.

“You need to get it down to that level so that you don’t just try to do it retrospectively at the end of every year, hiring a consultant and getting them to tell you what the emissions are. When you get it into the system and processes, into your day-to-day operations, is when you can get scope-three data easily and actually be able to track it on at least an annual basis.”

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