Angela Brown, CEO of Risilience, on where a climate assumption actually lands inside aprivate equity underwriting model, and where it does not apply.
Private equity holds an asset for three to seven years. Physical climate risk plays out over decades. The Fintech Times put that objection to Angela Brown, CEO of Risilience, which sells climate intelligence to investors, along with further written questions on whether climate capability is genuinely moving valuations or is mostly being talked about.
Her answers set out where a climate assumption actually lands inside an underwriting model, concede that public evidence of a valuation delta remains thin, and name the sectors where the argument does not hold. Six of the seven questions were answered.
Private equity holds an asset for three to seven years. Physical climate risk plays out over decades. So is a PE fund genuinely pricing climate, or is it pricing what the next buyer will believe about climate at exit?
It is both, but ultimately the two are becoming increasingly difficult to separate.
Private equity has never valued businesses based solely on today’s cash flows. It values future cash flows and future buyer expectations. Climate changes both. Physical risks are already affecting earnings through insurance, operating costs and supply chains, while the market’s understanding of those risks will increasingly influence exit valuations. Investors who ignore either side risk mispricing the asset.
What investors need to ask themselves alongside whether a climate event will occur during the hold period is whether the market at exit will recognise that risk and price it accordingly. Increasingly, buyers are asking for evidence that climate has been considered throughout the investment lifecycle, from underwriting through to value creation and exit. As our research shows, LPs are looking for evidence that climate risk is managed across the entire investment lifecycle, yet verifiable evidence of climate influence at exit remains
limited.
This is all about financial markets becoming better at recognising and pricing risks that already exist.
Is there evidence of an actual valuation delta attributable to climate capability? A
multiple, a spread, a real exit.
While not yet reported widely, there are accounts of a valuation delta attributable to climate capability. The evidence is still not reported particularly widely, although that may simply reflect the fact that the commercial drivers behind private deals are rarely made public.
You say leading LPs increasingly demand evidence that climate shapes underwriting.
Meanwhile much of the market has been quietly walking away from ESG labels and
mandates altogether. Which LPs, in which geographies, and is this in truth a European story
rather than a global one?
Our latest research, based on more than 500 senior LP decision-makers across North America, the UK and Europe, found that 93 per cent are actively engaging with their GPs on climate-related issues. Importantly, engagement levels do not differ materially between North America and Europe, suggesting a global baseline of investor expectations has now been established.
What is changing is the nature of those conversations. LPs are no longer asking simply what GPs are measuring; they increasingly want evidence of how climate is shaping underwriting, value creation and investment decisions. Our research found that highly engaged LPs are investing directly in GP capability through data providers, reporting tools and training, while also demanding greater consistency in how climate is incorporated into financial decision-making.
While the language around ESG may have softened in some markets, particularly in public debate, the commercial focus on understanding financially material climate risks has continued to strengthen across both North America and Europe.
Risilience sells climate intelligence, and the argument is that climate data alone is no
longer an advantage and financial integration is. Can you make the case in a form that would still hold if you had no product in the market?
Our view is that climate risk should be treated similarly to any other factor that has the potential to either impact valuation or investment performance. Where it is material to business resilience or presents a commercial advantage, one would expect this to be incorporated into the standard underwriting and management process.
When deal teams are forced to manually translate qualitative climate information into financial models, that information is inevitably less likely to be incorporated into investment decisions. Conversely, providing investment committees with a credible, climate-adjusted financial figure allows material climate risks to be assessed alongside every other commercial assumption and integrated directly into valuation and decision-
making. We see investors increasingly incorporating climate factors where they are financially material.
Concretely, what does climate capability change inside an underwriting model? Does it
move a discount rate, a terminal multiple, a capex assumption?
Typically, climate capability is incorporated into EBITDA calculations through its impact on revenue, operating expenditure (OPEX) or capital expenditure (CAPEX). This is the most direct application. It is less common today to adjust the discount rate.
These assessments aim to quantify the expected, unmitigated impacts of climate change on a business’s operations, such as lost operating days or increased input costs, and determine what investment in CAPEX may be required to offset those impacts. If significant CAPEX is anticipated, it needs to be incorporated into the buyout financials from the outset to avoid overstating free cash flow, overestimating debt-service capacity and ultimately overpaying for the asset.
Consider the example of a chain of theme parks. A traditional underwriting model may assume historical operating days continue into the future. A climate-informed model would instead account for the impact of more frequent extreme heat or high winds, which could reduce the number of operating days. Investments that diversify the business towards more indoor experiences could help offset these losses. This is the accounting that needs to be done.
Where does this argument not apply? There must be sectors and holds where climate capability is simply not a valuation factor.
Yes, there are certainly sectors where climate impacts are less financially material.
For example, many online services businesses have a very limited physical footprint and are therefore much more insulated from climate hazards. Even where they rely on physical infrastructure such as data centres, traffic can usually be re-routed in the event of isolated downtime. Their core transition risks are associated with electricity purchases and any potential carbon pricing embedded within them. However, this can typically be addressed through renewable energy procurement, which is becoming increasingly available.
As a result, the scale of any financial impact is likely to be disproportionately small compared with asset-heavy sectors or businesses where demand for goods or services can be more easily disrupted by climate events.
Ultimately, deal teams can fast-track climate diligence for asset-light digital platforms, reserving deeper financial underwriting for capital-intensive infrastructure, heavy industry or climate-sensitive supply chains where climate capability is much more likely to influence valuation.
The post Risilience: Climate Lands in EBITDA, Not the Discount Rate appeared first on The Fintech Times.
