PE left 3bn tonnes of emissions: Emmi

Emmi estimates that the private equity sector has left three billion tonnes of carbon footprint, but more precise figures are difficult to obtain in the opaque asset class.

The recently published Company Emissions Estimates for Private Markets report calculates that private equity comprises about 20% of an institutional investor's multi-asset portfolio.

Citing McKinsey data, global private equity investments reached $8.2 trillion in 2023.

"That year, industrial carbon emissions were 37.2 billion tonnes. Assuming PE is roughly 8% of global Gross Domestic Product (GDP) (~$105 trillion), then the sector's total carbon footprint was about three billion tonnes. This is not insignificant in comparison to the public equity footprint of ~11.4 billion tonnes," the report said.

Emmi highlighted the lack of emissions reporting requirements in the unlisted company sector has made it difficult to estimate the carbon footprint of private equity assets, and the sector as a whole. "This is an increasing problem for investors and other funders as their reporting requirements ramp up globally in 2025," Emmi said.

In overcoming data scarcity for unlisted companies, Emmi used a machine learning (ML) approach to estimating Scope 1, 2 & 3 emissions for private companies, as well as industry emission factors from input-output models.

Emmi said calculating the carbon footprint for private equity is important because many governments are increasingly making unlisted companies accountable in regulating carbon emissions in line with public companies. Exits will also need better carbon due diligence.

"A growing portion of PE firms are incorporating climate-related opportunities into their investment strategies and decisions, as these will likely have better 'exit' feasibility - the potential buyer group are now more than likely to have made climate commitments and will also require an understanding of the financial cost of a carbon price or regulation on the valuation of the company," Emmi said.

Previous Emmi research found that the global fixed income debt market faces significant climate-transition risks as trillions of dollars in outstanding bonds are exposed to potential financial disruption by 2030.

This represents a "GFC-level economic event" as more than $1.6 trillion in corporate debt faces extreme financial liability under a 1.5°C scenario, representing 4% of the global listed corporate bond market.