• Private Markets Decarbonisation Roadmap (PMDR)[1]: A useful tool is the PMDR framework (developed by Bain on behalf of iCl and PESMIT) which provides a common language that enables private market firms to disclose their assets’ decarbonisation evolution. The PMDR builds upon existing frameworks in the market, such as the Net Zero Investment Framework (NZIF)[2] and Science Based Targets Initiative (SBTi)[3], yet recognising a firm’s early-stage progress and not requiring fixed reduction targets or commitments. It’s designed to be a universal framework to communicate the progress of transition across several asset classes irrespective of where those assets are on their decarbonisation journey.
• Optimising sustainable risk and impact: ESG due diligence at the pre-investment stage highlights risks and opportunities of potential investments that are periodically reviewed post any investments. Investors should view decarbonisation not only as a challenge but also as a key value creation enabler, even in hard-to-abate sectors such as industrials. Beyond Renewables, which have been an investment target for decades, broader energy transition themes and impact investments, which positively contribute to the UN Sustainable Development Goals, all represent attractive, diverse investment opportunities.
• Accelerating sustainability in an evolving world: Despite the changes in the US administration, the momentum behind sustainability as an investment theme is not expected to stall. Indeed, market experts expect increasing industry collaboration and the emergence of an even broader suite of sustainable financing solutions aligned to ‘transitionary’ activities. This trend will drive further new investment opportunities.

The panel session was followed by three roundtable workshops, facilitated by Rahel Haque, Fazl Ahmad and Vishal Saxena of NatWest’s Climate & ESG Capital Markets team. Key learnings from these sessions included:

Roundtable 1 “Selecting the ‘right’ transition methodology and prioritisation of decarbonisation levers”

• Transition methodologies: The need to develop frameworks such as the PMDR and NZIF stems from the challenges faced by SBTi alignment. Participants stated that the SBTi validation process is lengthy, relies on consistently good quality data and does not cater for specific asset classes such as infrastructure. This has seen many players in the industry shift to internal science-based methodologies.
• Quantifying transition: Whilst most key discussions revolving around transition are qualitative, translating transition to financing is also important. Members of the roundtable mentioned that it’s difficult to put a market-standard price and margin benefit to transition funds since economic returns are considered the priority. However, there’s an intrinsic opportunity to improve assets that may be perceived as cheaper initially but have a higher value at exit following transition transformation. Additionally, general partners (GPs) should not be restricted to improve assets during the holding period; a clear intent and methodology or framework to improve should suffice.
• Encouraging decarbonisation from within: Participants acknowledged that the decarbonisation journey also includes reductions in operational emissions. Levers such as talent/employee sustainability training programmes and firm-level key performance indicators (KPIs) were identified to shift employees’ attitudes. This ultimately implies a more proactive ESG due diligence and risk management approach, enabling GPs and limited partners (LPs) to view the transition as an opportunity rather than a restriction.
   

Roundtable 2 “Measuring climate resiliency and how adaptation can create a competitive edge”

• Scaling resilience and adaptation – an imperative: Given the growing natural catastrophes and the prevailing high insurance protection gap, its essential for organisations to adapt at an accelerated pace and invest in initiatives that help them operate – and thrive – in an environment increasingly exposed to more frequent and severe physical risks. Investments dedicated towards resilience and adaptation – such as, for example, flood defences or fire-resistant assets - will ensure that communities are better equipped to withstand and recover from these events. However, whilst these commitments at a strategic level may be present to varying extents or indeed receiving greater investment, participants noted that still-nascent approaches to standardised definitions and criteria may present hurdles to the implementation and execution of adaptation strategies.
• Definitions and measurement – limitations and challenges: Participants discussed that whilst there is a clear ‘call-to-action’, there needs to be greater standardisation and alignment in understanding what good climate resilience looks like (e.g., definitions and criteria) and the associated projects and assets that could contribute. Whilst it was noted that progress is materialising (e.g. with the recent Climate Bonds Resilience Taxonomy [4] (CBRT), the experts agreed that it may still take some time for these classifications to filter through organisations. Over time, this will then enable companies to better identify how their initiatives align to these frameworksand to put themselves in a better position to unlock adaptation and resilience financing. This in turn will help create competitive advantages through innovative investment strategies and/or risk mitigation solutions.
• Partnerships and collaboration – the key enablers: This as a critical area that can unlock further financing. Insights from the CBI and Oliver Wyman are clear in this respect, noting the important role the private sector will play in supporting the already well-established public sector financing into these areas. Onboarding of taxonomies (e.g., as developed by CBI) can help drive more private sector investment into these areas, owing to greater clarity with regards to what can contribute towards resilience and adaptation.
   

Roundtable 3 “Eliminating residual emissions via nature-based solutions”.

• Use of carbon credits: There’s still limited usage at the fund level, but GPs are encouraging their portfolio companies to use carbon credits where relevant. However, ultimately this is a decision that portfolio companies will make unilaterally. At the GP level, carbon credits are increasingly being considered as the main tool to offset residual emissions. However, the integrity of carbon credits as well as public criticism around the use of such credits (“cutting emissions rather than offsetting”) remain key challenges.
• Nature as an ‘asset class’: While on the ‘wish-list’ of many LPs, investors are currently struggling to fit this asset class within existing risk appetite. Hence LPs need to be educated on the implications from a risk/return perspective (no concessional returns being implemented). Nevertheless, nature currently features most prominently as an environmental consideration in the pre-investment ESG due diligence.
• Mobilising private capital to nature-based solutions: In order to have private capital flow into nature assets, de-risking the capital structure through diversification of assets is as important as the utilisation of blended finance and collaborating with Multilateral Development Banks. However, the lack of track records and impact measurements remain key constraints.

Closing the event, Caroline Haas, Head of Climate & ESG Capital Markets, NatWest, stressed the important role of private markets in the transition to net zero: “The private markets, and collaboration within the industry, play a critical role in driving the transition to a low-carbon economy, fostering both sustainability and decarbonisation for a more resilient future.”

If you’re interested in the topics discussed at this event and want to learn more, then please contact: Shani Unantenne, Felix Eschwege, Rahel Haque or your NatWest Relationship Manager.

[1] PMDR Private Markets Decarbonisation Roadmap

[2] NZIF Net Zero Investment Framework

[3] SBTi Science Based Target Initiative

[4] CBRT Client Bonds Resilience Taxonomy