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The views expressed are those of the authors at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only. Past results are not necessarily indicative of future results. For more information, read our appendices on questions to consider, suggested readings, and key definitions below.
What is your strategy for aligning your business with the global low-carbon transition toward net-zero emissions? Have any of your company sites experienced climate-related incidents? Who is responsible for assessing and managing climate-related risks? In our view, private company managements and boards must be prepared to answer these questions and more from their investors.
Climate change is one of the defining investment challenges of our time, causing widespread disruption across many industries. We believe companies across all sectors and stages should develop and maintain thoughtful approaches to building resilience into their business models that consider the accelerating transition to a low-carbon economy and the worsening events exacerbated by climate change. This impacts a broader range of companies than one might expect, for example:
Many companies overlook and/or underreport climate-related risks and opportunities that can be material and important to disclose to stakeholders. However, we expect disclosure scope and quality to improve in the coming years. In our view, disclosure considerations are particularly relevant for private companies as they approach a public offering, but the material business risks and opportunities presented by climate change warrant consideration at all phases of a company’s life cycle.
The Paris Agreement outlines the international community’s commitment to limiting global warming to well below 2°C (preferably 1.5°C) compared to preindustrial levels. To meet this goal, greenhouse gas emissions must peak as soon as possible, and we must achieve net-zero emissions by 2050. Each signatory country submits a climate action plan with levers to address its highest-emitting industries.
Regulatory regimes often use disclosure requirements as a tool to promote well-functioning markets, and this includes encouraging more accurate pricing for climate change. For instance, the European Union’s (EU’s) Non-Financial Reporting Directive (NFRD) requires large companies to disclose their policies around environmental protection, and the European Commission has published guidelines on climate-related information.
While Europe is driving regulatory momentum, we also see jurisdictions like the United Kingdom, Hong Kong, and New Zealand considering implementing climate reporting requirements for listed companies. In the United States, the Securities and Exchange Commission (SEC) has proposed a rule to require public companies to report on material climate-related risks, greenhouse gas emissions, and net-zero targets or transition plans. If adopted, large companies would be required to begin disclosing this information by fiscal year 2024. As the regulatory landscape evolves, these requirements could become increasingly important for both public and private companies to consider.
Crucially, there is also growing awareness across the globe that climate change and the strategic transition it necessitates matter for returns and the stability of the financial system. This is exemplified in initiatives such as the Net Zero Asset Managers initiative, the International Sustainability Standards Board (ISSB), the Institutional Investors Group on Climate Change’s Paris Aligned Investment Initiative, the UN PRI’s Net-Zero Asset Owner Alliance, and the Race To Zero Campaign. Importantly, commitments to decarbonization extend across asset classes, so we think investor expectations for disclosure by private companies are likely to catch up to public companies.
In addition, the new requirements in the EU for sustainability‐related disclosures in the financial services sector (SFDR) will create mounting market pressure for enhanced disclosure by companies. This progress will be necessary to enable asset managers to measure investments in climate solutions for funds sold in the EU. Since this directive is based on fund domicile, European investor pressure will likely flow to global companies that are not directly subject to these requirements.
Wellington is dedicated to expanding our climate research capabilities across public and private markets. We will continue to pursue an aggressive research agenda on the physical and transition risks of climate change and the direct application into our investment processes. In addition to industry initiatives, our ongoing partnerships with Woodwell Climate Research Center and MIT help to deepen and broaden our understanding of the intersections between climate change and capital markets — including through new developments like our climate mapping tool. In our view, these capabilities make Wellington a strong partner for private companies as they consider climate-related risks.
We believe it is critical for companies to consider climate change as an enterprise risk in order to prepare for the opportunities and risks climate change presents. Furthermore, firms must also be ready to meet the related disclosure requirements that are likely to increase from both regulators and consumers, especially as they approach a public offering. In our view, companies that demonstrate a high-integrity and principled approach to climate change will be better equipped for these challenges.
To aid in this effort, we have put together a series of resources for companies to consider, including questions to expect from public market investors, suggested reading, and a list of key terms.
Every company — whether a consumer company with supply-chain risks or a data-intensive IT company with carbon costs for electricity use — faces its own climate-related risks and resulting oversight and disclosure requirements. We believe boards of directors and management teams will be expected to answer the below questions with the appropriate level of ESG expertise, particularly when climate-related issues arise.
Assessment of risk exposure and management tactics
Governance best practices in public marketsContinue reading
WellSaid: Partnering with portfolio companiesContinue reading
Understanding private equity performanceContinue reading
Biotech for the next decade: Private market innovationsContinue reading
Mid-year Alternative Investment OutlookContinue reading
The state of venture capital marketsContinue reading
Governance best practices in public markets
For private companies approaching the public markets, we highlight the corporate governance best practices that can help pave strong relationships with public market investors.
WellSaid: Partnering with portfolio companies
Co-head of private investing Michael Carmen explores how we partner with portfolio companies to help them along the "last mile from the private market to the public market" including on key ESG issues for private companies to consider.
Understanding private equity performance
We dive deep on best practices for measuring and benchmarking private equity performance. In addition, we outline the J-curve and the impact of fund lifecycle on returns.
Biotech for the next decade: Private market innovations
We explore our latest research in private biotech innovation across immunomodulatory therapies, precision oncology, antibody drug conjugates, radiopharmaceuticals, genetic medicines, and a range of other novel treatment modalities.
Mid-year Alternative Investment Outlook
This collection provides timely ideas across the spectrum of alternative investments -- including hedge funds, private equity, and private credit.
The state of venture capital markets
Co-head of private investments Michael Carmen shares his outlook for venture capital markets, including the state of deal flow, valuations, and the IPO market.
Private biotech market: Innovation, valuations, and capital efficiency
Co-heads of biotech private investments I-hung Shih and Nilesh Kumar join host Thomas Mucha to explore today's private biotech market, highlighting the state of deal flow, valuations, and innovation.
Cybersecurity for private companies
We highlight today's rising cybersecurity risks, explore how they impact private companies, discuss key regulatory considerations, and share best practices for companies facing these threats.
Private biotech: Innovation amid disruption
We explore the state of the private biotech market, highlight key areas of innovation, and share three themes we expect to continue.