Climate risk presents a unique opportunity to freshen the LP dialogue

For private equity, climate risk is no longer a fringe issue. It is becoming core to competitive strategy.

As investor pressure intensifies and regulation tightens, the firms that can internalise climate dynamics as part of disciplined value creation are likely to outperform in both returns and relevance, as they seek to future proof portfolio assets.

As the implications of both physical risks (e.g., extreme weather events, water stress, and sea level rise) and transition risks (e.g., carbon pricing, regulatory shifts, and technological disruption) become more acute, leading GPs are integrating climate analysis across the investment lifecycle; from pre-deal screening and due diligence to post-acquisition value creation and exit planning.

Private equity has always been a long-term investment play. However, PE practitioners need to stretch their investment horizons even further, into decades, as they confront the realities of climate change. Simply put, this means building stronger conviction and convincing LPs they have the right skill, discipline and creativity to steer companies in the right direction.

Imène Maharzi is Co-founding Partner at WEASTEM, Finance x Strategies for the New Climate Era, a strategy advisory firm offering support to accelerate transitions in European Finance. “The intersection of value creation, value protection and sustainability is a topic that we've been discussing and challenging for quite some time. In the ‘New Climate Era’, it can be applied to every single lever of value creation; the way you recruit people, the way you manage supply chains etc. It's a recognition of the reality we all live in.”

That reality is one that could hit Europe particularly hard, given that it is the world’s fastest warming continent. Devastating floods, intense heatwaves and the secondary impacts these have on food production, where to locate and build residential housing, energy grid resilience are significant factors as GPs think about mitigation (i.e. decarbonisation) as well as adaptation. A new EEA report reveals that vulnerable groups like the elderly, children, low-income households and people with disabilities, are most at risk and often do not benefit fairly from climate adaptation efforts.

Applying a 20^th Century investment mindset to a 21^st Century problem is no longer an option; GPs cannot afford to think in the same ways and expect the same outcomes. The world has changed.

In that respect, climate risk, at a macro level, presents a unique opportunity for GPs and LPs to re-engage and move the dialogue forward in terms of what it means to build high performing, resilient businesses.

As signal providers, it will become increasingly important to demonstrate to LPs how and where they are seeing the most germane opportunities for their funds, and why they have conviction that X or Y company has the right characteristics to successfully transform and thrive in the coming years.    

“LPs have the potential to be powerful signal providers too in a highly volatile and uncertain context,” says Maharzi, “but of a different kind. If you're exposed to multiple GPs, you are in an ideal position to collect data and signals, which become insights that you can distribute to your other GPs through your engagement channels. Sometimes you have pioneers, sometimes you have laggards, but the distance between the pioneers and the laggards in this situation cannot be too wide.”

Data-Driven Dialogue

Investors have more agency than they perhaps think when managing climate risks in their portfolios. Understanding what are the adaptation and resilience plans for any given company or project should lead to more data generation from GPs, and act as a catalyst to freshen the GP/LP dialogue. Supply chains are just one example of this. In light of recent volatility in the Red Sea, for example, an LP might want to know what a GP’s exposure is to supply chains in that region.

“Analysis of supply chain footprints is one of the ways we look at sustainability in the context of decarbonisation. It gives a new importance and a new value to ‘ESG data’, which entail a wide variety of qualitative and quantitative information, not necessarily available in other standard PE reporting dashboards. Until recently, said ‘ESG data’ were collected but not really analysed or leveraged into transformative plans, or tied-in to value approaches,” notes Maharzi.

While some of the largest firms - Blackstone, KKR, TPG - have made headline commitments or launched dedicated energy transition strategies, much of the practical progress is happening at the portfolio level, where operational improvements and climate resilience efforts are translating into margin gains and exit-readiness. Apollo has committed to reducing the carbon intensity of its flagship private equity portfolio by 15–25% over the ownership period. According to its 2023 Sustainability Report, Apollo deployed USD10 billion in     clean energy and climate investments across asset classes in 2023, as it pushes towards its $50 billion target.

At KKR, its Green Portfolio Program, which has been running since 2008, has had meaningful impact, leading to USD1.2 billion in cost savings and millions of metric tons of emissions avoided across 25 companies. Meanwhile, Carlyle has partnered with climate analytics provider Pachama and others to assess the impact of climate scenarios on its portfolios.

Taking a more thematic approach to investing in climate solutions, TPG’s fund, TPG Rise Climate, has raised USD7.3 billion to seek out companies that will thrive in the next generation economy. Investments include companies like Nexii (low-carbon construction materials), Monolith (clean hydrogen), and Form Energy (long-duration energy storage).

As PE groups take a front-foot stance on climate risk, tactical responses vary but several practical patterns are emerging:

1. Carbon baselining and reduction targets

Some GPs are using tools such as lifecycle assessments, Scope 1–3 emissions mapping and choosing to adopt Science-Based Targets (SBTs). Doing so provides a clearly defined pathway for companies to reduce greenhouse gas emissions in line with the latest climate science.

2. Enhanced climate diligence

Across the board, climate risk assessments are becoming a standard diligence module. This includes physical risk mapping using geospatial tools and scenario analysis to test business model resilience under different regulatory and transition pathways.

3. Operational decarbonisation

PE firms are taking a hands-on role in helping portfolio companies implement decarbonisation initiatives i.e. upgrading energy infrastructure, shifting to renewable power purchase agreements (PPAs), optimising logistics and redesigning product lines with sustainability in mind.

4. Thematic deal sourcing

Developing specific deal sourcing capabilities in climate-aligned sectors such as climate tech, grid infrastructure, sustainable agriculture, in order to harness secular tailwinds and build climate-resilient portfolios.

There are many other ways GPs may look to approach climate risk, as part of a co-joined defensive and offensive investment strategy. With renewed vigour in how they build dialogue and trust with LPs, and a recognition, across general partnerships, that new creative ways of thinking are needed to transition companies, climate risk could prove to be a key catalyst for re-framing long-term value creation.

When it comes to supply chain transformation, not all technologies are yet commercially available for hard-to-abate industries.

The opportunities for GPs are nevertheless continually evolving.

“I hear more and more emerging managers entering discussions with corporates to be anchor investors in their funds to identify companies early on that will allow them to decarbonise their supply chains in a timely and cost-effective manner,” concludes Maharzi.