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Overview: What you can do

• Focus on investments that provide innovative products and services for greenhouse gas mitigation and climate change adaptation

• Identify risks to private equity investments from changing physical, regula-tory and consumer environments

• Actively engage, through direct ownership stakes or through private equity intermediaries, in designing climate-aware business and investment strate-gies for investee companies

I. Private equity and responsible investment[

Private equity – particularly venture capital – plays a special role in enabling the growth of specific forms of economic activity. These investments may take place at various stages of a company’s life cycle, from early stage venture investments to the purchasing and delisting of a publicly traded company. Investors may in-vest in private equity through conducting their own transactions or as a limited partner of a private equity fund. When making such an investment, a limited partner places the active ownership interactions with the general partners. Due to their financial structure, private equity investments are usually only available to institutional investors or high net worth individuals.

While private equity investments focused on restructuring and resale have been criticized for short-termism, at their best, private equity and venture capital have a long-term focus. A long-term time horizon offers responsible investors the opportunity to help shape a private equity market which rewards wealth cre-ation across the triple bottom line. The long-term commitment of these invest-ments ideally heightens the materiality of environmental, social and governance factors to financial return. Private equity investment may also offer investors the ability to take active roles in the orientation of investee business practices.

II. Private equity and climate change

Investors can choose to seek private equity and venture capital funds that take

Fixed-IncomePublic EquitiesPrivate EquityReal EstateInfrastructureCommoditiesHedge F that shift. As in other asset classes, private equity investors will also want to

address the risks that climate impacts in the future may have on their portfolio, whether from exposure to new regulations or to climactic impacts that change consumer demand.

Although investing in a company at its earliest stage increases financial risk, investors at this stage have more scope to influence the environmentally sound operating policies and procedures, reducing future climate risk which may per-haps even mitigate some of the financial risk incurred by investing in the early stage. Private equity investments generally, and venture investments in particu-lar, also provide the opportunity for investors to specifically direct companies toward climate-friendly business practices.

III. How private equity investments address climate change

Investors may focus on a variety of factors when determining a climate-change-related investment strategy for private equity. Particularly popular approaches are:

• Conducting an analysis of the environmental impact of the investment company’s products;

Massachusetts Green Energy Fund seeks to invest in Massachusetts-based renewable energy companies able to achieve strong financial returns. Potential investments include solar photovoltaic power, wind power, biomass, biofuels, fuel cells and other enabling technologies that promote the expanded use of renewable energy.

Investing in companies at the seed, start-up, growth and expansion stages, Good Energies uses a long-term investment strategy and diversi-fies its alternative energy investments across wind, solar, green build-ings, and energy efficiency.

• Assessing how the business operations of the investment company are con-ducted in order to improve environmental sustainability;

US Renewables Group is converting a coal power plant in New York State to wood biomass, and sees potential for further conversions of similar plants in the U.S.

• Targeting investments that will help catalyze growth in an entire industry such as clean energy.

California’s venture capital community saw economic potential to assist the state in its efforts to reduce carbon emissions and has worked closely with the state to help fund solar rooftops, deploy infrastructure for fuel-ing hydrogen cars and earmarkfuel-ing funds for aggressive energy efficiency programs. For example, after venture capital firms Khosla Ventures and Kleiner, Perkins, Caufield & Byers (KPCB) provided funding to Ausra, a developer of utility-scale solar power technology, the company entered into a 177 megawatt solar thermal power purchasing agreement with Pacific Gas and Electric Company.

• Create a pipeline through requests for proposals (RFPs).

Large investors may write requests for proposals specifically stating the form of environmental benefits most relevant to them. The RFP may identify the types of products, specify policies, or require certain disclosures. By doing this, inves-tors are given the freedom to set their own terms of climate-related investment strategy.

Private equity investors should remain cautious of the effect market volatility may have on their investments. As the promise of uncertain new technologies, and the dynamic value assigned to carbon and other emissions, is priced into

Fixed-IncomePublic EquitiesPrivate EquityReal EstateInfrastructureCommoditiesHedge F and its relationship to higher food prices, for instance, offers a cautionary tale of

climate-related investment enthusiasm and a case study in the complex nature (and value) of integrating environmental, social and governance information into investment decisions.

IV. Evaluating private equity and venture capital investments through a climate lens

While private equity poses high risk due to uncertainty and the absence of a liquid market for shares, considering environmental factors in private equity investments can add long-term value to the asset class. As noted, time horizons are necessarily crucial in climate-related investing. Private equity investors may develop a climate-related due diligence process at an early stage of investment analysis, to better determine the long-term impacts of climate change on poten-tial investments.

For instance, a climate change analysis may be applied to assess:

• The impact of carbon emissions’ exposure on future costs

• Changing regulatory and subsidy structures affecting the company’s com-petitive environment.

Specifically for green companies, areas to consider include:

• The large amount of capital needed for clean technology companies to get off the ground

• The need for clean technology companies to differentiate themselves in the rapidly growing field

Investors may collaborate with each other to form networks that use private capital to promote sustainability. This allows the climate conscious investor to pay close attention to developing a channel of potential investments. Joining these networks may result in co-investments or other types of collaboration to further the investors’ missions. (In some cases, a fund of funds may perform a similar service, giving investors exposure to a broader range of products).

Networks may also work to encourage entrepreneurs to focus on developing businesses with high-impact environmental missions.

The Environmental Defense Fund and Natural Resources Defense Council brokered an agreement with private equity giant KKR and the Texas Pacific Group to back their investment in TXU in exchange for their pledge to reduce carbon emissions and throw out plans to build coal-fired power plants.

V. Private equity and stakeholder engagement

Investors can use their position to influence management or seek to invest in funds run by firms that do this. Engagement may involve oversight of the internal practices of portfolio companies. For example, investors may choose to work with management during the due diligence process to get an environmen-tal action plan into place. Post investment, investors may require the company to report on its environmental status monthly or quarterly as part of the share-holder agreement.

The Cleantech Venture Network brings together clean technology investors and entrepreneurs in order to facilitate the financing of clean tech companies. Members have access to several databases that provide useful information for the deal seeking investor.

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