Climate change across our portfolio
Hg recognises the major challenges that the world is facing due to climate change. Slowing the rate of global warming over the next ten years is crucial for the future of the planet. According to the National Oceanic and Atmospheric Administration (NOAA) there is more carbon dioxide in our atmosphere today than at any time in human history and research by World Wide Fund for Nature (WWF) shows that average wildlife populations have dropped by 60% in just over 40 years. The Intergovernmental Panel on Climate Change (IPCC) warn of “severe, widespread and irreversible” climate change effects unless emissions are at least halved by 2030. In November 2021, the climate conference, COP26, further highlighted the role of businesses to set Paris-aligned carbon reduction targets.
Hg published its first Taskforce on Climate-Related Financial Disclosures Report in 2021 (click here), which outlines our governance, strategy, risk management and metrics and targets related to climate risks and opportunities. We support the disclosure of clear, comparable and consistent information on these areas.
As a private equity firm, Hg recognises its position to encourage its portfolio of companies to align to Net Zero as well. We believe that by better understanding and managing the emerging risks and opportunities that arise from climate change we can enhance our investment decisions.
Portfolio carbon reduction targets
The Science Based Targets initiative (SBTi) is considered the most robust method for the corporate sector to reduce emissions in their activities and investments, with over 2,700 companies and financial institutions taking action. It is based on the principle that emissions must be halved before 2030 and drop to net-zero by 2050 to not exceed 1.5°C and avoid catastrophic impacts of climate change. As part of our involvement in the iCI (see page 16), Hg is one several firms who have invested in and worked together to create an SBTi standard for the Private Equity industry. Hg was one of the first PE firms globally to road test the standard and have our carbon reduction targets approved by the SBTi.
Hg’s detailed targets include:
- 50% reduction in our direct emissions (Scope 1 and 2) by 2030
- All portfolio companies to have adopted science-based targets by at least 2040
This should not be at a cost to business. According to the SBTi, companies that adopt science-based targets report that it also helps:
- Boost profitability
- Improve investor confidence
- Drive innovation
- Reduce regulatory uncertainty
- Strengthen brand reputation
Setting a science based target (SBT) is the highest level of GHG reduction ambition that a private equity firm can go for in transitioning toward a zero carbon economy. Through a private equity firm’s direct involvement and influence with so many private businesses, they are uniquely positioned to activate significant greenhouse gas (GHG) reductions in the real economy. It has been pleasing to support Hg who understand this and see science‑based GHG reductions as crucial to the long-term resilience of their investments.”
We are going for net zero across all our portfolio within the next 20 years. We are absolutely committed to how this is going to be achieved”
Matthew Brockman Hg Managing Partner
Portfolio carbon footprint
Hg is committed to cutting carbon emissions across our portfolio in line with the recently published SBTi PE standard with the ultimate goal of achieving net zero by 2050. In 2021, we conducted a carbon footprinting exercise of all our portfolio companies by collecting scope 1, 2 and 3 emissions data, in line with the GHG protocol. For our 2022/23 carbon assessment, our focus has been on improving data quality on scope 3 emissions, recognising that the highest source of a company’s emissions are scope 3. For software companies this largely resides in data centres which use large amounts of electricity to process and store data. As part of our partnerships with some of the world’s largest cloud service providers, we are working closely with these players to raise awareness across our portfolio companies and provide tools to help them calculate the footprints that are arising from data centre usage.
By supporting our portfolio companies to calculate their carbon footprints, we are hoping to enable them to think more strategically about how to mitigate climate-related risks and identify opportunities for reducing their carbon emissions. It will also better position them to comply with current and future GHG reporting requirements and improve credibility and reputation among stakeholders, potentially increasing profitability and benefiting from cost savings through operational efficiency measures.
As part of our commitment to SBTi in late 2021, we are now starting to engage portfolio companies and encourage them to set targets in line with SBTi too. This will then necessarily spur action to reduce energy consumption and business travel, switch to renewable energy sources and actively seek to work only with cloud storage providers that have Net Zero and renewable energy goals.
Portfolio companies with data centres with carbon reduction targets
Portfolio companies with green initiatives
Portfolio companies with carbon reduction initiatives
Renewable energy sourced across portfolio companies
Assessing climate change risks across our portfolio
Hg specialises in the software and services sector, which generally has lower financial risks related to climate change compared to other sectors that rely on energy-intensive processes or sourcing raw materials with complex supply chains. Furthermore, our portfolio companies are businesses headquartered predominately in Northern Europe and North America, which generally are areas that are less vulnerable to climate change risks and have more stringent policies in place.
Hg assesses the climate change risks and resilience of all our businesses as they join the Hg family. As a private equity firm, our typical hold period is between 3-5 years, but it can go beyond that. We recognise that climate change has a longer-term impact than our investment timeline. Our climate change risk assessment covers risks and opportunities at the portfolio level until 2030, which is the timeframe that most externally recognised climate risk frameworks currently align to.
At Hg, climate-related risks and opportunities are covered across the investment process – from screening to ownership. Throughout the investment process we focus on two main categories of climate-related risks:
- Transition risks, arising from the shift to a lower-carbon economy, which include policy and legal risks, technology risks, market risks, and reputational risks.
- Physical risks, arising from a changing climate, which include acute risks (such as extreme weather-related events), and chronic risks (such as sea-level rise).
Our climate change risk assessment tool, developed by PwC highlights if and where these risks occur and considers how resilient each portfolio company is in managing any potential risks.
PwC was delighted to work with Hg to develop a climate change risk screening tool helping them to identify key risks and opportunities in the sectors and geographies where Hg invests. Key considerations in the software and services sector are policy risks associated with energy consumption including carbon pricing mechanisms and regulation to improve energy efficiency. The tool helps bring these risks to life by providing context via impact pathways and resilience questionnaires.”