Little is said about the fundamental role that Private Equity can play to mitigate climate change. Some transactions in the sector are fostering, for example, green hydrogen or the circular economy in Spain, but up to now the leading role has been played by governments, corporations and investors in decarbonizing technologies.
In a strategic-business context, in which it seemed that almost everything was invented and financial value was linked to incremental business plans, Sustainability has emerged as a disruptive differentiator. Virtually all sectors are facing a deep transformation.
An ideal playing field for Private Equity.
However, as in the case of businesses, not all private equity firms are open or prepared to:
- Understand Sustainability from a strategic perspective and not as a mere regulatory requirement or an update of traditional CSR; an opportunity to simultaneously grow in financial value and positive environmental and social impact.
- Lead the redefinition of sectors, value chains and business models required by decarbonization, going far beyond traditional recipes such as operational optimization and sector consolidation.
- Refresh the premises on which investment decisions were made 3-5 years ago, when decarboniaztion was mainly associated with the energy sector.
Taking advantage of the opportunity of embedding sustainability into strategy implies an evolution of the sector's management practices:
- Include in the due diligence an assessment of a) the business model according to the new competitive requirements and climate action, and b) comprehensive scenarios of profitable growth, emissions reduction and societal improvement.
- Review the business plans of the portfolio companies using the Sustainability lense. There will be more opportunities than risks for those who do it first.
- Incorporate expert and transversal knowledge, with influence on portfolio and businesses strategy definition.
The path towards Net Zero will not be completed in 2050 without an active Private Equity involvement. Of course, not all firms are going to be successful in this new scenario. Sustainability does not wait for laggards.