Private Equity Sector Science Based Target Setting Guidance

Emission removalThe action of removing GHG emissions from the atmosphereand storing through various means, such as in soils, trees,underground reservoirs, rocks, the ocean, and even productslike concrete and carbon fiber (SBTi 2021).Finance SectorScience BasedTargetGuidanceEmission ScopesThe GHG Protocol Corporate Standard classifies anorganization’s GHG emissions into three scopes. Scope 1emissions are direct emissions from owned or controlledsources. Scope 2 emissions are indirect emissions from thegeneration of purchased energy. Scope 3 emissions are allindirect emissions (not included in scope 2) that occur in thevalue chain of the reporting organization, including bothupstream, downstream emissions, and in the context of thisGuidance, emissions in Category 15 associated with PE firms’investment and lending activities (SBTi 2021).Finance SectorScience BasedTargetGuidanceEnterprise ValueIncluding Cash(EVIC)The sum of the market capitalization of ordinary shares atfiscal year end, the market capitalization of preferred shares atfiscal year-end, and the book values of total debt andminorities’ interests. To avoid the possibility of negativeenterprise values and considering that cash as an importantfinancing source for many companies should carry its fairshare of emissions, no deductions of cash or cash equivalentsare made (SBTi 2021).Finance SectorScience BasedTargetGuidanceFinancedemissionsAbsolute emissions that banks and investors finance throughtheir loans and investments. Financing emissions can becalculated and disclosed at an asset class level (SBTi 2021).Finance SectorScience BasedTargetGuidanceFinancialinstitutions (FIs)The Science Based Target Initiative (SBTi) defines FIs ascompanies whose business involves the dealing of financialand monetary transactions, including deposits, loans,investments, and currency exchange. If 5% or more of acompany’s revenue or assets comes from activities such asthose described above, they are considered to be FIs.Development FIs are currently out of scope (SBTi 2021).Finance SectorScience BasedTargetGuidanceFunds of FundsA PE firm which invests in funds, rather than directly intocompanies. Fund of Funds managers are frequently alsoactive participants in the secondary market (Guy, 2010).Private Equityas an AssetClass, SecondEdition by GuyFraserSampsonFully dilutedsharesThe total number of common shares of a company that will beoutstanding and available to trade on the open market after allpossible sources of conversion, such as convertible bonds andemployee stock options, are exercised (Investopedia 2021).Investopedia7Private Equity Sector Science Based Target Setting Guidance - Draft for Public Consultation V1

General Partner(GP)A manager of a Private Equity fund (fund manager) is knownas a GP since most Private Equity funds take the form ofLimited Partnerships (LPs), and these are required by law tohave a GP to manage their affairs. GP can refer either to themanagement entity or to individual partners within suchentities. GPs raise capital from third party entities, into aspecific fund which will then be invested into certain types ofassets according to an investment strategy. GPs thus identifythe assets to be invested in, execute those investments andthen manage them until eventual exit, and offer no liabilityprotections for the partners (Guy, 2010).Private Equityas an AssetClass, SecondEdition by GuyFraserSampsonGreenhouse gas(GHG) emissionsThe seven gases covered by the United Nations FrameworkConvention on Climate Change (UNFCCC)—carbon dioxide(CO2), methane (CH 4), nitrous oxide (N 2O),hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), sulfurhexafluoride (SF6), and nitrogen trifluoride (NF3) (SBTi 2021).Finance SectorScience BasedTargetGuidanceGHG ProtocolComprehensive global standardized frameworks to measureand manage GHG emissions from private and public sectoroperations, value chains, and mitigation actions. The GHGProtocol supplies the world's most widely used GHGaccounting standards. The Corporate Accounting andReporting Standard provides the accounting platform forvirtually every corporate GHG reporting program in the world(SBTi 2021).Finance SectorScience BasedTargetGuidanceGHG accountingGHG accounting techniques that include two primaryapproaches to tracking GHG emissions resulting from acompany’s operations: corporate accounting through anannual GHG inventory, which involves financed emissions aspart of the accounting; and project accounting throughestimating net emission reductions or increases from individualprojects or activities relative to a baseline scenario (SBTi2021).Finance SectorScience BasedTargetGuidanceGrowth capitalAlso referred to as growth equity or expansion capital, it’s atype of private equity investment (often a minority investment)in relatively mature companies that are looking for primarycapital to expand and improve operations or enter newmarkets to accelerate the growth of the business. Growthcapital is separate from venture capital (Investment Council2021).InvestmentCouncilIndirect emissionsEmissions that are a consequence of the activities of thereporting entity but occur at sources owned or controlled byanother entity (SBTi 2021).Finance SectorScience BasedTargetGuidanceInfrastructureprivate equityThis term refers to investing in the equity of infrastructureassets to gain ownership and control. There are dedicatedinfrastructure PE firms, but plenty of pensions, large banks,sovereign wealth funds, and other entities also make “equityinvestments in infrastructure” (Mergers & Acquisitions 2021).Mergers &Acquisitions8Private Equity Sector Science Based Target Setting Guidance - Draft for Public Consultation V1

Infrastructure debtLike private debt, infrastructure debt is not traded or issued inan open market. Lending private infrastructure debt can be toboth listed or unlisted companies. Infrastructure debt fundsinvest in debt linked directly to projects and to corporateentities dependent on the debt strategy. Infrastructure debtfunds target project finance —but there is no single definitionamong investors of what constitutes infrastructure. Investorshave different interpretations of exactly what assets meetinfrastructure criteria. As a result, sector and riskexposures of funds differ (Cambridge Associates 2018).CambridgeAssociatesInvestmentTo invest is to allocate money/capital with the expectation of apositive benefit/ profitable returns in the future, typically asinterest, income, or appreciation in value (Wikipedia 2021).WikipediaLenderThe PE firm who is lending capital to the borrower via credit orprivate debt loans.AnthesisLeveragedbuyouts (LBO)An LBO is one company's (i.e., the PE firms) acquisition ofanother company (i.e., the Portfolio Company (PC)) using asignificant amount of borrowed money (from LPs) to meet thecost of acquisition. A LBO occurs when the buyer (PE firm)uses the loan to gain control (i.e., majority) of anothercompany, with the assets of the firm under acquisition oftenacting as collateral for the loan. In an LBO there is usually aratio of 90% debt to 10% equity. The buyer may replace all orpart of the current management team or keep the existingmanagers and reward them for meeting new goals. Typically,the new owner is actively involved at the board level(Investopedia 2021).InvestopediaLimited Partner(LP)In the US, and increasingly in Europe, an investor in PrivateEquity funds is known as an LP, since most Private Equityfunds take the form of Limited Partnerships (Guy, 2010).Private Equityas an AssetClass, SecondEdition by GuyFraserSampsonListed equity andbondsThis includes all corporate bonds without known use ofproceeds and all listed equity on the balance sheet and/oractively managed by the FI (SBTi 2021).Finance SectorScience BasedTargetGuidanceMezzanine debtIs subordinated debt that is repaid after senior debtors arerepaid in full. Mezzanine debt is often used in buyout and thusmezzanine debt can include equity share (Pitchbook 2021).PitchbookMulti-strategyFundsMulti-strategy funds engage in a variety of investmentstrategies (Eureka Hedge 2021).Eureka HedgeParis AgreementThe Paris Agreement, adopted within the United NationsFramework Convention on Climate Change (UNFCCC) inDecember 2015, commits all participating countries to limitglobal temperature rise to well-below 2 C above preindustrialFinance SectorScience BasedTargetGuidance9Private Equity Sector Science Based Target Setting Guidance - Draft for Public Consultation V1

levels and pursue efforts to limit warming to 1.5 C, to adapt tochanges already occurring, and to regularly increase effortsover time (SBTi 2021).Portfolio Company(PC)A PC is a company or entity in which a PE firm invests in(Wikipedia 2021).WikipediaPrivate equityA set of capital assets that are not available for publicexchange, and are investments that are made discreetly anddirectly in a private company, without being brought to publicknowledge. Preferred stock equity is a type of mezzaninecapital that is senior to common stock but subordinated todebt.AnthesisPrivate equitydirect investmentPrivate equity direct investment is medium to long-term financeprovided in return for an equity stake in unlisted companies.This is deployed through strategies such as buyouts. As wellas investment in more mature companies, private equity directinvestments can be broken down into growth capital andventure capital, for less mature and/or smaller businesses(BVCA 2021).BVCAPrivate equity (PE)firmThe GP serves as the PE firm, also referred to herein as theproxy parent.AnthesisProject financeOn-balance sheet loan or equity with known use of proceedsat the level of economic activity, such as, within infrastructurethe construction of a gas-fired power plant, a wind or solarproject, or energy efficiency projects (Finansdanmark 2021).FinansdanmarkProxy parentThe GP serves as the entity that consolidates the GHGinventory for its operations (i.e., scope 1 and 2) and itsinvestment and lending activities within its managed funds(i.e., scope 3 category 15), and submits the targets. I.e., theproxy parent is not at LP level.AnthesisReal EstateProperty consisting of land and resources attached to it. In thecontext of this Guidance, real estate refers to service andresidential buildings (Investopedia 2021).InvestopediaReal estate debtThe most common real estate debt strategy is direct lendingfor real estate acquisitions. This may include the buying andselling of securitized real estate loans in the secondary market(Pitchbook 2021).PitchbookScenario analysisA process of analyzing future events by considering alternativepossible outcomes (SBTi 2021).Finance SectorScience BasedTargetGuidance10Private Equity Sector Science Based Target Setting Guidance - Draft for Public Consultation V1

Science-basedreduction targets(SBTs)Targets adopted by companies to reduce GHG emissions areconsidered “science-based” if they are in line with what thelatest climate science says is necessary to meet the goals ofthe Paris Agreement—to limit global warming to well-below2 C above preindustrial levels and pursue efforts to limitwarming to 1.5 C (SBTi 2021).Finance SectorScience BasedTargetGuidanceScope 1 emissionsEmissions from operations that are owned or controlled by thereporting company (SBTi 2021).Finance SectorScience BasedTargetGuidanceScope 2 emissionsEmissions from the generation of purchased or acquiredelectricity, steam, heating, or cooling consumed by thereporting company (SBTi 2021).Finance SectorScience BasedTargetGuidanceScope 3 emissionsAll indirect emissions (not included in scope 2) that occur inthe value chain of the reporting company, including bothupstream and downstream emissions (SBTi 2021).Finance SectorScience BasedTargetGuidanceScope 3, category15 (investment)emissionsThis category includes scope 3 emissions associated with thereporting company’s loans and investments in the reportingyear, not already included in scope 1 or scope 2 (SBTi 2021).Finance SectorScience BasedTargetGuidanceFor category 15, the GHG Protocol Corporate Standard onlyrequires the inclusion of corporate debt holdings with knownuse of proceeds. This Guidance goes beyond this requirementand thus expands the minimum boundary of category 15. PEfirms shall follow the emissions measurement requirements inthe relevant asset class methods and measure emissions ofdebt investments without known use of proceeds, whereapplicable.SecondaryA secondary interest is an ownership position in an existingfund which may or may not be fully invested but has not beenfully exited and wound up. Such interests are usually more orless freely transferable, and a thriving secondary market hasgrown up to cater for such transactions, a number of specialistfirms having been set up for the purpose (Guy, 2010).Private Equityas an AssetClass, SecondEdition by GuyFraserSampsonSequesteredemissionsRefers to atmospheric CO 2 emissions that are captured andstored in solid or liquid form, thereby removing their harmfulglobal warming effect (SBTi 2021).Finance SectorScience BasedTargetGuidanceSector-specificmetricsEnergy or carbon intensity metrics that use a physical unitdenominator and are applicable to a specific sector. Examplesinclude kgCO2/MWh (power), MWh/m2 (real estate), etc. (SBTi2021).Finance SectorScience BasedTargetGuidance11Private Equity Sector Science Based Target Setting Guidance - Draft for Public Consultation V1

Small andmedium-sizedenterprises(SMEs)For companies, the SBTi provides a streamlined targetvalidation route for SMEs, where an SME is defined as a nonsubsidiary, independent company with fewer than 500employees. PE firms should thus direct investees with morethan 500 employees to the regular SBTi validation route.Finance SectorScience BasedTargetGuidanceSpecial situationsDebt or structured equity investments made with the intent ofgaining control of a company; generally, one in financialdistress (Pitchbook 2021).PitchbookTotal balancesheet valueThe sum of total Equity and Liabilities, which is equal to thecompany’s Total Assets (Open Risk Manual 2021).Open RiskManualVenture CapitalProfessional equity co-invested with the entrepreneur to fundan early stage (seed and start-up). Offsetting the high risk, theinvestor takes is the expectation of higher-than-average returnon the investment. Venture Capital is separate from growthcapital (Investment Council 2021).InvestmentCouncilVenture debtDebt financing extended to companies with venture capitalbacking. For entrepreneurs, venture debt serves to extend therunway to exit without further diluting ownership (Pitchbook2021).Pitchbook5. Introduction5.1.IntroductionAs the world is struggling to recover from the Covid-19 pandemic in 2021, the extreme effects ofclimate change are no longer abstract or distant concepts. Recent deadly floods in China andEurope, extreme heat in Canada, Finland and Ireland, and massive wildfires in the westernUnited States are striking warnings that the world may be accelerating towards an irreversibletipping point of the planetary system. The Intergovernmental Panel on Climate ChangeAssessment Report 6 (IPCC 2021) is the landmark study delivering the starkest warning to dateof the risks to humanity from anthropogenic climate change with an unequivocal body ofevidence.To decarbonize the global economy in alignment with the goals established by the ParisAgreement, all economic actors in the real economy need to reduce their greenhouse gas(GHG) emissions at a rate sufficient to remain aligned with the emissions pathways establishedby climate science. Having long focused on risks climate change poses to the profitability andlongevity of financial activities, it is crucial for financial institutions (FIs) to shift focus to theirimpact on climate through their investment and lending activities and leverage their influence inthe economy to facilitate the transition to a net zero economy. Private equity (PE) firms, throughtheir long-term investment strategies and considerable influence over their portfolio companies(PCs), are particularly well positioned to support PCs for a low-carbon transition. As an asset12Private Equity Sector Science Based Target Setting Guidance - Draft for Public Consultation V1

class that has experienced and will continue to experience tremendous growth and influence, itis critically important that the private equity sector take immediate actions to facilitate thetransition of the private markets to a net zero economy by 2050.5.2.Purpose of this GuidanceTo enable wide adoption of science-based targets (SBTs) by private equity investors, ScienceBased Target Initiative (SBTi) developed this Guidance for PE firms to set targets for theiroperations and investment portfolios that are aligned with the reductions needed to stay in linewell-below 2 C and 1.5 C climate scenarios. The guidance is tailored to the unique businessmodels and asset classes of private equity (PE) firms and provides practical guidance for PEfirms to compile a GHG inventory and develop SBTs for their key asset classes. It identifieschallenges PE firms commonly face to develop and achieve targets and makesrecommendations to overcome these common barriers. SBTi intends to raise the ambition of theprivate equity industry by defining and promoting best practice in SBT setting and providingmethods, criteria, guidance and tools to reduce the barriers to adoption and implementation.For the development of this Guidance, SBTi formed an Expert Advisory Group, a group ofvolunteer advisors from the private equity industry, academia, consultancies, non-profit andmultilateral organizations with in-depth knowledge in SBT setting for the private equity industry.The EAG serves in a technical advisory capacity for the SBTi private equity sector project andprovides requested input and advice to priority topics and decisions.5.3.Guidance audience5.3.1.Overview of different types of PE firmsPE firms are fund management businesses who raise money from third parties to investin private assets. The raised capital is accumulated in private equity “funds”; these funds arespecific vehicles and separate corporate legal entities. These are “closed-end funds” that arenot listed on public exchanges; as such, they are considered to be an alternative investmentclass. Whilst not legally the parent company to the fund, the fund managers, also referred to asGeneral Partners (GPs) and are typically its founders, set its direction and manage itsinvestment and assets. GPs managing private equity direct investments, private debt,secondaries, and fund of funds are the principal audience for this Guidance.5.3.2.General Partners vs. Limited PartnersPrivate equity investors are often made up of GPs and Limited Partners (LPs). The GP primarilyraises capital from third party entities including family offices and large institutional investorssuch as pension funds, into a specific fund vehicle (the “fu

9.2.1. Real estate private equity definition 33 9.2.2. Electricity generation private equity definition 33 9.2.3. Relevant criteria 33 9.2.4. SDA for real estate private equity investments 34 9.2.5. SDA for electricity generation private equity investments 34 9.3. Asset classes: private equity direct investments including buyout, growth capital and