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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
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The role of ESG in fintech
Global Industry Analyst Matt Ross and Portfolio Manager Matt Lipton explore the role of ESG in fintech in this clip from their WellSaid podcast episode.
Picture this: Our 2023 economic forecast in five charts
We explain the shifts the market is undergoing, analyze the implications for different asset classes, and identify potential risks and opportunities in a series of visuals.
Human capital management for private companies
We discuss why effective people management is critical for private companies and outline four strategic focus areas that can help companies navigate evolving employee needs, regulatory changes, and investor expectations.
Fintech opportunities after the recent pullback
In four short videos videos, our fintech investors explore the sector's outlook amid today’s dispersion and highlight the long-term growth potential in payments, fintech incumbents, and crypto innovation.
Private equity outlook: Why we see a buyers’ market ahead
Co-Head of Private Investments Michael Carmen shares his outlook for the private equity market, highlighting today's normalizing multiples, continued innovation, and, in a number of cases, fewer competitors for the most attractive deals.
Opportunity in disguise: Why bad news may be good for alternatives in 2023
Multi-Asset Strategists Nick Samouilhan and Adam Berger explain how alternative investments may help allocators make tailwinds out of macro and market headwinds in the year ahead.
Five key ESG topics for private companies in 2023
Our ESG for Private Investments Team explores five critical ESG topics for private companies in the year ahead.
2023 Alternative Investment Outlook
Members of our iStrat and private investment teams share their views on opportunities in liquid alternatives, private equity, and private credit, as well as the ESG landscape for private companies.
ESG in private markets: Insights for 2023
We highlight five key areas for private companies to prioritize in 2023 and share the essential steps they can take to keep up with today’s evolving ESG risks and opportunities.
Key drivers for investors in 2023 and beyond: sustainability, disruptive technology, and alternatives
Head of Asia-Pacific Client Group Scott Geary reflects on the overarching themes from the 2022 Milken Asia Summit and the future of investing.
Measuring impact in venture capital
We highlight why venture capital matters to impact investors and how to authentically measure and manage impact in this asset class.