HarbourVest's Annual ESG Report

Climate change

In the World Economic Forum’s 2023 Global Risks Perception Survey, over 1,200 global experts across academia, business, government, the international community, and civil society ranked the most severe global risks over two and ten years. While the two-year risk focus was somewhat more focused on societal and geopolitical issues, the top four risks over ten years were:

Failure to mitigate climate change

Failure of climate change adaption

Natural disasters
and extreme weather events

Biodiversity loss and ecosystem collapse

The reality is these risks are occurring in real time. As of October 2023, the US set a new record with 24 billion-dollar disasters attributed to extreme weather events, surpassing the 2020 record of 22 such events, with three months still remaining in the year.10 The link between rising temperatures due to human activity and extreme weather was demonstrated by the Eastern Canadian wildfires; extreme heat across North America, Europe, and China; and Mediterranean flooding.11 Extreme weather events present material risks to the operations and supply chains of companies that operate in these regions but also present opportunities for innovation in pursuit of solutions.

We believe this is the essence of climate resiliency and adaptation strategies that companies are increasingly building and which investors are increasingly seeking to understand as part of an investment assessment. As HarbourVest outlined in Climate and energy transition investing: A market in motion, private capital is increasingly financing the innovations that are providing a path toward delivering on global decarbonization goals.

Insights from HarbourVest's AGM

Our ESG team held a break-out session at our Annual General Meeting in May 2023 focused on how asset owners are thinking about positioning their total portfolios for a low carbon transition. For the presentation, we constructed a model emissions reduction glidepath for a diversified investor across public equity, public fixed income, real estate, and private equity. This portfolio also considered investment in negative emissions technology, to represent an investor with a net zero emissions commitment.

Key milestones

Collect emissions data and set a baseline

Set short-term target to
reduce emissions by
40-60% by 2030

Set long-term target to
reduce emissions by
>90% by 2050

Invest in negative emissions

Model net zero glidepath for a diversified portfolio

In evaluating how an asset owner might incorporate private equity into an emissions reduction strategy, HarbourVest referenced data from the Paris Aligned Asset Owners (PAAO) initiative, a group of allocators that have committed some part of their portfolio to be on an emissions reduction trajectory. According to PAAO data, for those signatories with portfolio decarbonization targets, listed equity and corporate fixed income were often covered by the target (100% and 76%, respectively); on the other hand, private equity was included in only 5% of the targets.12

To address the reasons for this discrepancy, we identified three key requirements to setting emissions reduction targets: reliable emissions data, standardized methodology, and the operational ability to implement targets if set. While these three criteria are generally accessible for listed equity, there are key challenges for private equity: a lack of quality emissions data, limited methodology for target-setting between GPs and LPs, and unique operational challenges such as illiquidity constraints and tension between high growth expectations and emissions reductions.

Listed Equity
Corporate Fixed Income
Real Estate
Private Equity

To achieve net zero, we need...

Data

Methodology

Operational feasibility

To achieve net zero, we need...

Listed equity

Data

Methodology

Operational feasibility

Corporate fixed income

Data

Methodology

Operational feasibility

Real estate

Data

Methodology

Operational feasibility

Private equity

Data

Methodology

Operational feasibility

High quality

Medium quality

Low quality

While these challenges may exist, we identified a number of positive signals that may support target-setting in the near future, including:

  • The ESG Data Convergence Initiative, which will support the collection and dissemination of reported emissions data from private companies
  • Industry guidance such as the iCI-ERM Greenhouse Gas Accounting & Reporting for the Private Equity sector, which HarbourVest contributed to and was published in May 2022
  • Investor influence and regulatory pressures encouraging GPs to develop climate change strategies

We believe this research helps us better understand how HarbourVest’s investors are considering private equity in their decarbonization strategies.

Initiative Climat International (iCI)

In 2022-2023, we invested significant time and thinking on climate change alongside our peers through our role as global coordinator of the iCI. This included co-leading the development of the iCI-ERM GHG accounting and reporting guidance for private equity which “translated” the Partnership for Carbon Accounting Financials (PCAF) standards for private equity fund use.

Through our proactive role with the iCI, we are also proud to be working with industry peers to achieve a consistent way of communicating decarbonization activity at the portfolio level, with the recent release of the Private Markets Decarbonization Roadmap (PMDR). The iCI teamed with Sustainable Markets Initiative’s Private Equity CEO Task Force (PESMIT) to commission the development of this roadmap by Bain & Company. HarbourVest’s Natasha Buckley co-led the project in her remit as iCI Global Chair and the effort was supported by Co-CEO Peter Wilson via his role as a member of PESMIT.

Continuation solutions encompass a host of transaction types in which a GP secures interim liquidity and/or additional primary capital for their LPs in a strongly performing asset, or set of assets, that the GP will continue to own and control. Specifically, they include continuation funds, new funds created by GPs for the purpose of acquiring the asset(s) that continue to be managed by the same GP and capitalized by one or several secondary buyers, or equity recapitalizations involving a direct equity or structured equity investment into a portfolio company. These transactions can also include a parallel investment from the GP’s latest fund into that same pool of assets (a “cross-fund trade”).