ERM and the Private Equity Taskforce of the Sustainable Markets Initiative (PESMIT) have published guidance for valuation of carbon in the context of pre-investment, aimed at private markets participants.

The guidance was developed based on insights from the climate change working group, a sub-group of PESMIT. Leveraging the 2023 Valuing Carbon in Private Markets publication, it provides practical considerations to support investment decisions based on quantifiable metrics.

While the guidance has been designed for the pre-investment process, its components can also be applied post-acquisition to quantify financial value.

It considers five core components to valuing carbon in the pre-investment process:

1. Regulated carbon costs - Costs imposed by regulation on a specific sector in a geography that result in actual cash outflow (e.g. via ETS, carbon tax).

2. Internal carbon costs - Self-imposed costs based on self-assessed view of carbon prices (e.g. price set by firm or portfolio company to achieve net-zero targets).

3. Indirect carbon costs - Incremental costs or benefits incurred as a result of the relative carbon footprint, can be driven by revenue (e.g. higher / lower customer demand) or costs (e.g. higher / lower financing costs.

4. Decarbonization value creation - Reduction in regulated and internal carbon costs and increase in indirect carbon benefits from pursuing decarbonization actions (e.g. adding solar to reduce footprint). This is further broken down into specific decarbonization value creation levers such as decarbonization costs and savings, voluntary carbon costs, sustainability-linked financial instruments and sustainable growth.

5. Carbon adjusted multiple - Self-imposed adjustment in valuation multiple at exit when exit EBITDA does not reflect carbon-related future growth and earnings risk (e.g. future carbon prices / decarbonization strategy not reflected), based on self-assessed view of the specific context of a given business and its environment.

Based on these five components, the guidance sets out a methodology for quantifying total carbon equity value created during a transaction and hold period. For example, it illustrates how an initial investment in decarbonization measures can reduce OPEX spend, lower the cost of capital, and create opportunities for potential revenue generation, while decarbonizing during the hold period can lead to an improved multiple upon exit due to the high demand for lower carbon intensive assets.

Andrew Radcliff, Global Head of M&A Advisory at ERM said: “The private markets have a key role to play in accelerating the transition to net zero. However, we need to be able to demonstrate empirically that real financial value can be created through decarbonization.

“This guidance provides a practical series of steps that show how decarbonization value creation potential can be quantified prior to making an investment then implemented throughout the investment hold period, with value being created through top- and bottom-line improvements as well as through exit multiples.”

Kurt Björklund, Executive Chairman at Permira said: "Our business is delivering long term value to our investors. In the transition to a low carbon economy, quantifying climate risks and opportunities helps us focus on what really matters. This publication offers practical considerations for private equity firms."

About ERM

Sustainability is our business.

As the world’s largest specialist sustainability consultancy, ERM partners with clients to operationalize sustainability at pace and scale, deploying a unique combination of strategic transformation and technical delivery capabilities. This approach helps clients to accelerate the integration of sustainability at every level of their business.

With more than 50 years of experience, ERM’s diverse team of 8000+ experts in 40 countries and territories helps clients create innovative solutions to their sustainability challenges, unlocking commercial opportunities that meet the needs of today while preserving opportunity for future generations.

Learn more here.

About PESMIT

The Sustainable Markets Initiative’s Private Equity Task Force brings together leading private equity firms to identify ways that the industry can accelerate progress towards a more sustainable future. Focusing on climate change, nature and sustainability-related metrics for private markets, it leverages expertise within each member firm and works with the other Sustainable Markets Initiative's Task Forces. 

PESMIT was launched in 2021 and is the first ever CEO-level private equity working group established to discuss ways the industry can effect change. It leverages expertise within each member firm across three priority areas: climate change, biodiversity and sustainability-related metrics. PESMIT brings together leading private equity firms to accelerate progress towards a more sustainable future. Through its working groups PESMIT has focused on three areas:

  • Integrating climate change-related considerations into the investment process;
  • Identifying the value of and risks to biodiversity and natural ecosystems and approaches to protecting them; and
  • Bring clarity on sustainability-related metrics for private markets.

Read more: Private Equity | Sustainable Markets Initiative (sustainable-markets.org)

About the Sustainable Markets Initiative

His Royal Highness, The Prince of Wales, launched the Sustainable Markets Initiative (SMI) alongside a 10-point action plan at Davos in January 2020. The SMI is a network of global CEOs working together to build prosperous and sustainable economies that generate long-term value through the balanced integration of natural, social, human and financial capital.

The SMI facilitates the development of responsible transition pathways at industry and business levels to decarbonize and achieve net-zero, create a Nature-positive future and support a trust transition towards a sustainable future.

Read more: www.sustainable-markets.org.