Our latest eBook sets out why carbon accounting has shifted from a reporting exercise to a strategic priority for fund managers operating in private markets, and what the numbers are telling us.
Investor expectations are increasing
Limited partners, including pension funds and sovereign wealth funds, are placing greater emphasis on the climate competence of general partners. Over 70% of global LPs now assess general partners on their ability to measure and reduce financed emissions, according to PRI's 2023 survey. The largest allocators are drawing a direct line between climate competence and fiduciary performance. This is increasingly influencing mandate design and manager selection.
At the same time, the cost of capital is starting to split along climate lines. Firms with credible transition plans are beginning to access lower financing costs, while those exposed to transition or physical risks face higher borrowing costs. In debt markets, many sustainability-linked loans now include emissions KPIs tied directly to pricing.
A practical tool for value creation
Robust carbon accounting provides fund managers with better visibility over operational performance, cost drivers, and opportunities for efficiency. Energy efficiency investments in manufacturing deliver median returns of 18–32%, according to a 2022 IEA study, but these opportunities are difficult to identify systematically without structured carbon data.
Leading PE firms are already weaving carbon metrics and decarbonisation trajectories into their 100-day plans and value-creation programmes. This is helping them identify CapEx focus areas, set management KPIs, and prepare portfolio companies for exit valuations that increasingly take climate readiness into account.
As more industries incorporate climate considerations into procurement, regulatory compliance, and competitiveness, portfolio companies with credible carbon footprints are better positioned to protect and grow market share. Increasingly, carbon readiness also influences exit valuations, with buyers expecting clearer evidence of climate risk mitigation and transition planning.
Navigating persistent challenges
For all the progress made, Scope 3 emissions continue to present serious challenges. These indirect emissions across a company's value chain often account for 95% or more of its total carbon footprint, yet nearly half of companies are currently off track in meeting their Scope 3 goals, according to the Science Based Targets initiative (“SBTi”).
The choice between top‑down and bottom‑up approaches also presents trade‑offs: top‑down methods offer speed and broad coverage, while bottom‑up methods support more accurate decision‑making and auditability. The rapid growth of AI‑supported emissions calculation tools introduces additional considerations. While automation can streamline data collection, it can also exacerbate data gaps or methodological inconsistencies if not accompanied by appropriate governance and oversight. The eBook addresses these emerging risks and provides guidance on how fund managers can establish robust controls.
Operating within a shifting geopolitical and market landscape
Broader energy and climate dynamics continue to shape the environment in which private equity firms operate. Technological developments, including rapid advances in renewable power, battery systems, and electrification, are influencing market competitiveness and accelerating the pace of decarbonisation in many sectors. At the same time, geopolitical developments and pressure on energy security are driving further investment in clean technologies, even as regulatory ambition varies across jurisdictions.
These structural forces highlight the importance of incorporating climate considerations into investment strategy, even where political signals are mixed.
What fund managers should do next
We offer practical guidance for fund managers looking to strengthen their approach, including establishing carbon baselines and focusing on the most material emissions sources, adopting hybrid methodologies that balance speed with accuracy, and establishing governance processes to ensure data quality and auditability.
For fund managers who want to understand exactly how carbon accounting fits into their investment process, due diligence, and exit strategy, the full eBook offers essential guidance.
To access the full analysis and practical guidance, download the eBook: Carbon accounting as a strategic imperative for private equity fund managers
