Sustainability insight | 12 Jun 2026 |

Travers Smith's Sustainability Insights: What can (private markets) investors do about climate change?

Alternative Insights Summit 2026

We are hosting our fifth annual Alternative Insights Summit on 18 June. The day is a flagship, invitation only event for the alternative asset management industry which will this year explore the theme of "Disruptors and the disrupted".

Our summit is aimed at senior representatives from the alternative asset management industry. Spaces are limited, but if you would like to register your interest in attending, please get in touch.

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KEY INSIGHTS

Investors should be realistic: A new report argues that a decade of disclosure targets and stewardship has failed to drive real-world decarbonisation, because technology development and government policy – not investor pressure – are the primary determinants of how quickly economies transition.

Private markets have real advantages – but clear limits: A sponsors' greater agency over portfolio companies gives private markets a genuine edge, but fiduciary duties mean no manager can pursue climate goals unless it is in the interests of their LPs or consistent with a specific mandate.

Policy engagement is the under-used lever: Private markets managers – closer than most to what makes a project financeable – are well placed to tell governments what conditions will attract private capital, and that expertise could be deployed more deliberately, and more often.

A regular briefing for the alternative asset management industry.

What can investors do about climate change? A report addressing this crucial question – a question which merits more attention than it gets – was published last month. The report, funded by the Environmental Defense Fund and the LSE's Global School of Sustainability, draws on workshops with more than 60 senior representatives of asset owners and managers. It is a sobering analysis, but do the conclusions also apply to alternative asset managers?

The authors' central argument is this: Over the past decade, many investors became convinced that they could drive real-world decarbonisation through disclosure, top-down target setting, and stewardship. But, on their own, asset managers and asset owners cannot deliver major change. Government policy and technology development determine how fast economies decarbonise. Investors play a supporting role, not a leading one.

It has sometimes suited investors to overstate their ability to effect change, but the outcomes have been disappointing, and the messages are now evolving. The report argues that the shift from a market-led to a policy-led narrative is crucial. It suggests that investor climate action needs to be rebuilt on more realistic foundations.

Although much of the reaction to the report has focused on implications for those investing in listed companies, its analysis is also relevant for asset managers in private markets.

As the report says, in general, asset managers are in a different position to asset owners, with more constraints and weaker incentives when it comes to climate action. But private fund sponsors will be quick to point out that they are not inhibited to the same extent as public market asset managers – and that's true.

However, it is important not to over-reach: GPs are also limited in what they can do.

One important theme of the report is agency, and the limited influence that can be claimed by public markets investors. The report urges investors to be realistic in what they can expect from engagement and stewardship. For example, investors may be successful in their attempts to get companies to focus on financially material climate-related risks and opportunities. But they are unlikely to persuade companies to act against their own commercial interests.

In contrast, many private markets fund sponsors will have more agency, although the extent varies with strategy. Most obviously, a private equity firm is well-placed to give a clear direction to portfolio management: 'climate risk is financial risk, and we expect you to manage it'.

Moreover, the incentive structure encourages sponsors to do that: a firm will generally expect to hold an asset for between three and seven years, and will earn carried interest on sale, based on the exit price. The buyer is likely to undertake thorough due diligence and to price in financially material climate-related risks and opportunities. That means there is a clear incentive for a private equity owner to focus on those during its ownership period – to ensure they are managed, so that they are positively reflected in the enterprise value at the point of sale.

"Government policy and technology development determine how fast economies decarbonise. Investors play a supporting role, not a leading one."

So greater agency and sharper incentives might catalyse more action – and organisations like the Initiative Climat International (iCI), with nearly 300 members, would certainly suggest that. Unlike some other sustainability-related coalitions, iCI remains well-supported and influential.

Relatedly, the report's recommendation to de-emphasise sector-agnostic top-down portfolio decarbonisation targets in favour of bottom-up, asset-level plans is what we already see in private markets and is well suited to their model. Tools such as the Private Markets Decarbonisation Roadmap (PMDR) have been developed for precisely that purpose.

One of the report's more practically useful concepts – and one that translates directly into the private equity context – is what the authors call 'limitations-aware engagement'. The idea is straightforward: stewardship of portfolio companies is most effective, and most credible, when the requests made of management are commercially beneficial.

But firms need to be realistic. Private capital firms face the same constraint as public market investors: they are very unlikely to direct action that is against the company's financial interests, even if it might help save the planet, or address the systematic risks that should worry large LPs. The GP's own fiduciary duty to its LPs – and the incentives that support that duty – would prevent that, absent a specific mandate (which is rare).

That means that private markets firms, while rightly emphasising their focus on financially material climate engagement, are being more careful to link that to value creation. They cannot, and do not, claim to act against the financial interests of their portfolio companies or their LPs in pursuit of wider climate goals.

In short, public policy is crucial: governments need to ensure that sustainability pays, otherwise fiduciary-bound, financially-driven investors will only partially deliver the changes needed. GPs should explicitly acknowledge their limitations.

That leads to another relevant theme – and perhaps the report's most striking conclusion: that policy engagement is an under-utilised lever for climate conscious investors. Private markets investors should take note. The argument is clear: investors close to the action know better than most what policy conditions are needed to make a clean energy project financeable. That expertise is already being deployed in dialogue with governments, but no doubt there is room for more. While social policy advocacy might be regarded as special pleading and lacking in legitimacy, "Level 2" engagement – helping policymakers to understand what will attract private capital – is entirely appropriate and will support a manager's duty to maximise outcomes for LPs.

The report's headline message – that investor climate action needs to be rebuilt on more realistic foundations, with policy rather than markets doing the heavy lifting – is one that private markets firms are well-placed to absorb. In many respects, the model the report recommends already describes good private equity practice: asset-level focus, commercially grounded engagement, clear incentive alignment between sponsor and portfolio company, and a direct line between sustainability action and value creation. The challenge for GPs is less about adopting a new framework than about being precise and honest in how they describe what they are doing and why – to LPs, to regulators, and with themselves. That's legally sensible as well as more deliverable.

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