Climate Standards and Investor Toolkit

Investors around the globe are contending with a range of market challenges along with financial and climate risks in the energy and infrastructure space. Most large institutional investors have taken important steps to incorporate sustainability into investment policies as part of a fiduciary duty to mitigate risks as investors seek returns. Building off of research done by the Private Equity Climate Risks consortium, PESP has developed three new resources as tools to support private market investors’ efforts in building sustainable portfolios in the face of these challenges.

The investor resources include:

1. Climate Standards for limited partners to adopt into their investment policies
2. Energy Transition Due Diligence Questionnaire with detailed questions to ask managers as a tool for due diligence and monitoring
3. Investor Climate Policy Comparison that highlights some of the leading climate policies by large institutional investors

Investors face long term material risk from climate disasters, while private equity fossil fuel investments generate gigatons of carbon emissions

Projections of economic damages from the climate crisis are soaring, creating a material concern for fiduciaries with a long-term investment horizon. Since 2021, the US alone experienced climate-related weather disasters costing over $460 billion that caused over 1,800 deaths. Climate change damages are projected to cost $38 trillion a year by 2049, cutting nearly 20% of global income.

As private markets have grown to nearly $15 trillion, private equity, private infrastructure, and real assets firms have sunk tens of billions of dollars into energy. The significant majority of these energy investments are in fossil fuel assets dedicated to drilling oil, fracking gas, and burning coal, in addition to refineries, pipelines, and gas export terminals.

The 2024 Private Equity Climate Risks Scorecard revealed alarming new details about the extent of private equity investment and the environmental impacts. The Scorecard revealed that just 21 firms are responsible for over 1.17 gigatons of annual emissions. This research provides valuable insights for institutional investors with private equity, private infrastructure or real assets allocations, and should be integrated into climate risk assessments, due diligence protocols, and sustainability policies.

The Net Zero Asset Owner Alliance in April noted the risk that investors in the private market face, stating that “publicly traded companies may push some actors to sell brown assets into the less transparent private market,” requiring “increased focus on private assets and on asset managers investing in them” to ensure effective decarbonization.Private market investors seeking to mitigate climate risk must continue to engage private market managers to build low-carbon, resilient investment portfolios that reduce financial risk, adapt for the energy transition, and adhere to a 1.5 degree pathway. These Climate Standards and investor resources can assist in that process.

We invite investors to review these policy tools and consider incorporating them. It is our hope that institutional investors and limited partners consider integrating these resources into policies and practices to ensure private market managers are building resilient portfolios for the just energy transition.