As the urgency around decarbonization grows, private equity fund managers face increasing pressure to align their portfolios with credible carbon targets. While setting ambitious goals is important, the real challenge lies in building a strategy that is both practical and achievable. The right tactics are essential much like playing chess — each move needs to be deliberate, forward-thinking, with long-term success in mind.
This article focuses on a fund’s strategy in getting their portfolio companies to set targets in order to achieve a fund level target of targets, which is the most common type of carbon reduction target for PE funds. Each fund’s strategy will be different for how to approach target setting for their portfolio companies, and fund managers need to understand the chess pieces on their gameboard.
Capture the “pawns” – for early wins
A fund manager’s first step is to identify quick wins. Think of these as your “pawns” — companies with relatively small carbon footprints that are easier to work with. These companies can often set streamlined carbon targets quickly, particularly if they fall under the threshold for Scope 1 and Scope 2 emissions.
For example, companies with less than 10,000 tons of annual Scope 1 and 2 emissions may qualify for streamlined SME targets by the Science-Based Targets initiative, with minimal complexity. By starting with these low-hanging fruits, fund managers can demonstrate early progress toward their overall decarbonization goals, build momentum, and lay a foundation for tackling larger challenges down the road. But keep in mind that this will only be appropriate for a small portion of your overall carbon footprint because these companies tend to have relatively small carbon footprints.
Advance to the “Knights” — More complex but critical to reach an overall target
Once the simpler targets are in place for small portfolio companies, it’s time to move on to the “knights” in your portfolio. These are companies with larger footprints, such as those operating in agriculture, forestry, or land use, which often involve more complex GHG emissions. While these companies may require more tailored solutions, their impact on your overall portfolio’s carbon footprint is significant.
The key here is to apply a strategic, pragmatic approach. Instead of trying to impose one-size-fits-all targets, fund managers should assess each company’s specific carbon reduction challenges and opportunities. By sequencing efforts based on readiness and opportunity, you can ensure steady progress without overwhelming either your portfolio companies or your resources.
Go for the “Queen” at the right moment
In every portfolio, there’s often one or two companies that dominate the overall carbon footprint — this is the “queen” of your carbon target game. These companies have carbon footprints that are typically larger or more complex, and may even have dedicated internal sustainability resources. However, these “queens” may not always be ready to set targets immediately, and external factors like customer pressure, management buy-in or business case may not yet be strong enough to justify action right away.
Fund managers must assess the best time to engage with such companies. Think strategically about how to leverage internal resources, industry trends, and investor pressure to capture the “queen” by setting a credible carbon target when the timing is right.
The long game: Closing in on checkmate
The ultimate goal is for all portfolio companies to have credible, science-based GHG targets. By approaching this like a chess master, fund managers can prioritize their moves, focusing on the easiest and most impactful opportunities first, while waiting for the right moment to tackle more complex challenges.
Understanding the emission hotspots across your portfolio and how to engage management to gain buy-in is critical for the rapid decarbonization needed to secure a future we can thrive in. Get started today, our team is ready to support you.