Michael Moore’s Outlook on the opportunities and risks of climate change for the industry

Think opportunity, not risk. That’s the simple advice offered to me when I joined one of the “Big Four” a few years ago. It was no doubt based on good psychological principles, and it was certainly driven by hard-earned business experience. After all, who doesn’t prefer to think “value creation” rather than “risk mitigation” when a challenge presents itself?

Not every situation fits such an optimistic, Panglossian world view, however. Facing up to climate change is one such. Things are stark. After last autumn’s climate negotiations in Egypt at COP27, experts assessed the level of atmospheric CO2 is 50% up on pre-industrial levels. We are on course to miss the mid-century 2.0 degree celsius cap on global temperature increases, which was thought to be the minimum to avert disaster.

Looming failure

That looming failure is simple enough to explain – while the agreed international targets look robust, limiting the rise to 1.5 degree celsius or thereabouts, the actions pledged by governments fall far short, suggesting an increase of up to 2.7 degree celsius. Net Zero it won’t be, according to the UK’s Climate Change Committee. The risk of failure is exceptionally high.

And yet. If we just leave things there as a gigantic set of risks, we will fail to get a grip and make the necessary changes. So, the “think opportunity, not risk” injunction is really important here.

A separate report to the UK government in mid-January, authored by former minister Chris Skidmore, was explicit that “Net Zero is the economic opportunity of the 21st century”. The report draws on a McKinsey study highlighting the potential that global Net Zero transformation could contribute £1tn to the UK economy. Worth having a look, then.

Unsurprisingly, private capital is already on the case. And not just in responding to the regulatory push in this area. There is, of course, a near endless flow of new regulations and initiatives requiring measurement and reporting on emissions and pathways to Net Zero.

Let us for the moment leave SFDR, TCFD, SDR, PRI et al to the side – the industry in all its forms is now heavily engaged in the responsibilities it has to address climate change, market its products appropriately and report on performance.

Industry’s thinking

So what are the opportunities? If you will excuse the urgency pun, you can capture the industry’s thinking in the acronym “ASAP” – “advancing solutions, adapting portfolios”.

The Skidmore report name checks all the familiar areas where we need solutions to the climate revolution, from energy supply to heating and efficiency improvements. We were pleased that he also supported our call for clarity on a roadmap of development, then deployment, of Net Zero R&D and technologies leading up to 2050.

Advancing solutions to each aspect of the transformation is where private capital sees great opportunity (not forgetting the risk). But already the industry is adapting portfolio companies to the changing realities. Let’s be candid, sometimes it’s simply because it is a regulatory requirement, at other times because it is the right thing to do – but more and more because it is the smart business decision.

The long-term thinking that underpins the private equity model is not just thinking about how the business performs today under one firm’s ownership - it has to be informed by the needs of future owners, too, so perhaps looking a dozen years or more years ahead.

The further into that time horizon we travel the greater the need for adaptation, so for most private equity businesses, the work has already started.

Opportunity grasped, risk averted. And a good outcome for the planet – win, win, win.

Michael Moore
Chief Executive, BVCA

This article was originally published on 15 February 2023 on the Private Equity News website here.