Firms should set short-term goals to achieve long-term ambitions, according to CDP, Bain study.
Private companies are “significantly trailing” public counterparts in disclosing their climate-related impact, according to joint research by global management consulting firm Bain & Company and environmental disclosure platform CDP.
The ‘Closing the Public-Private Environmental Transparency’ report quantified the transparency gap between public and private companies reporting to CDP on their decarbonisation progress, finding that 64% of public companies by global market capitalisation (4,400 firms) currently report to the platform, but, for private companies, this drops to less than 1% of the total universe (8,700 firms).
Eighty-eight percent of these public companies have outlined their Scope 1 and 2 emissions, compared to less than half of assessed private companies. Further, 70% of the public cohort and 29% of private companies reported to CDP on their Scope 3 emissions.
Only 37% of private companies have set emissions reduction targets, compared to 73% of public companies, the report added, although 51% of the largest assessed private companies with more than US$100 million in revenue disclosed setting targets.
Private companies cited challenges such as resource constraints, capability gaps and a lack of urgency from leadership as limiting their reporting progress.
“We are seeing emissions reporting challenges turn into bigger issues for private companies, as increased regulation looms and pressure from investors and consumers intensifies,” said Marc Lino, a Partner at Bain leading the firm’s ESG efforts in private equity.
CDP and Bain’s recommendations for private companies include laying out their long-term ambitions against a series of short-term goals to establish momentum, implementing ESG metrics to track progress, and publicly communicating their commitment to net zero.
“Investors require decisive data that is consistent, comparable and comprehensive across both public and private markets,” said Pratima Divgi, North America Director of Capital Markets at CDP.
“To make this possible and support them in setting and meeting their own net-zero ambitions, [investors] expect private companies to fully engage with standards on environmental disclosure and reporting that align to the Taskforce on Climate-related Financial Disclosures.”
Little by little
While increased pressure from regulators and policymakers has pushed public companies and investors to improve their climate-related disclosure of risks and impacts, it is beginning to have a knock-on effect for private companies and private equity (PE) investors, the CDP and Bain report said.
Calls have also increased for the largest firms to be subject to the same climate reporting requirements as listed firms.
A recent survey conducted by Bain and the Institutional Limited Partners Association (ILPA) noted that 70% of the institutions private markets rely on most for their capital have now adopted ESG policies, with 85% of them implementing policies specifically aimed at their PE investments.
Eighty-eight percent of private companies said they have now appointed someone in the company with responsibility for their climate strategy – 70% of which have ensured this is someone at board-level, said the CDP and Bain report.
Last year, CDP collaborated with investors collectively managing over US$2.3 trillion in assets to launch a standardised climate change disclosure platform for private markets, which includes a mechanism for modelling emissions based on reported input data. This is to help avoid “emissions leakage” between asset classes, such as public companies selling high carbon assets to private companies, CDP said.
The Institutional Investors Group on Climate Change (IIGCC) Paris Aligned Investment Initiative (PAII) is currently consulting on its proposed net zero guidance on aligning PE portfolios with decarbonisation targets under its Net Zero Investment Framework (NZIF). The framework also offers net zero guidance for listed equities, corporate fixed income sovereign bonds and real estate.
To date, more than 50 asset owners have signed up to the PAII’s Net Zero Asset Owner Commitment, which includes the requirement to adopt the NZIF to decarbonise their investments.
In October, a new ESG Data Convergence Project was launched to streamline PE’s approach to collating and reporting on comparable ESG data from portfolio companies. The initiative was led by PE firm The Carlyle Group and US pension fund California Public Employees’ Retirement System (CalPERS) and supported by general partners and limited partners representing more than US$4 trillion in AUM.
Other existing methodologies and metrics for measuring the net zero alignment of PE portfolio companies include the Transition Pathway Initiative (TPI) and the Science Based Targets initiative (SBTi).