Few ideas have gained global traction as fast as Net Zero. Companies large and small are adopting their own Net Zero goals. But does this pose problems for smaller, fast-growing companies that may fear a conflict between their growth ambitions and their need to limit carbon emissions? Ralph Hora, Head of Business Development for the DACH region and Chair of Pemberton’s ESG Working Group, explains Pemberton’s approach to Net Zero and how the firm works with its portfolio companies to mutual benefit.

Pemberton is a leading European private credit manager with AuM of €10.3bn* across four strategies and investments across Europe. We believe we have a responsibility and the ability to be a steward in expanding the importance of ESG within private credit. So we have implemented a proactive, innovative approach to ESG inside our firm, with our portfolio companies and within the private credit community.

In 2019 we began to work with EcoAct, a consultancy specialising in carbon emissions reduction. They analysed our carbon footprint and helped us select a project to offset our own carbon emissions.

More recently we have joined the Net Zero Asset Managers’ Association, one of very few private debt lenders to do this so far. This Net Zero initiative requires engagement with portfolio companies, and we encourage them to reduce their emissions.

Since 2020, in the deal documentation we offer to our portfolio companies we outline an explicit connection between reducing their carbon footprint and cutting the cost of their debt funding. In simple terms, a YoY 20% reduction in annual emissions means a cheaper cost of funding for our borrowers. This concept naturally appeals to the private equity sponsors that we work with, who like the idea of access to more attractive financing for their portfolio companies and supporting the ‘Race to Zero’. It appeals to our own LPs, who put ever greater emphasis on ESG considerations. And it appeals to us at Pemberton, because we want to put practical ESG engagement at the centre of our approach to asset management.
But what about the companies? Is this just another burden for management already under pressure? In fact, I believe that a focus on ESG can actually help companies to grow and prosper, but it’s essential to do it the right way.

There are four steps for any company on the route to Net Zero. First, lay a solid foundation by engaging with stakeholders, shareholders, customers and employees. Secondly, set targets and define your ambition in terms of a timeline – are you thinking 2030 or 2050? Thirdly, quantify and really understand your baseline emissions for scope 1 and 2 (direct) and 3 (indirect, including the end-use of your products). This requires really granular data if you are going to set credible KPIs. And fourthly, develop a realistic plan to begin to reduce those emissions.

Sometimes I am asked if it is too early for SMEs to focus on these issues. Actually, we believe that it is absolutely necessary to set ambitious targets at an early stage in a company’s development. After all, these will be the large companies of the future. Early adoption also makes it easier to integrate Net Zero goals into a company’s DNA rather than being seen as a later add-on.

Our portfolio companies understand that they benefit directly from a policy of carbon emissions reduction. That can mean a reduced cost of capital or enhance their ability to attract millennial talent. Quite rightly we find that many graduates are very focused on and energised by ESG issues.

Of course we don’t have any illusions about this. It takes effort for mid-size companies to push for Net Zero goals, but we are convinced that there are genuine opportunities for them that arise out of that effort.

We started our own Net Zero journey within Pemberton. We are continuing it as partners with the companies that we finance. Who wants to join us in the Race to Zero?

*Assets under management are defined as committed capital. As at June 2021.

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