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Miguel Gonzalo, CFA
Partner & Head of Investment Strategy and Risk Management
Yohan Hill
Principal & Director of ESG and Responsible Investing, Investment Strategy and Risk Management

Introduction

Our TCFD Journey1

Adams Street integrates considerations of material ESG factors, which include climate-related risks and opportunities, into investment decision making. Additionally, and for certain products and strategies where doing so is described in the relevant governing documents, Adams Street assesses the potential positive impact of our investments on the global challenge of climate change. Since 2020, when we became a public supporter of the Taskforce on Climate-Related Financial Disclosures (TCFD) recommendations, Adams Street has developed a firmwide approach to address these risks and opportunities as part of our investment process.


Governance

Embedding Climate-Related Risks and Opportunities in Our Wider ESG Approach

Adams Street generally seeks to promote greater transparency on climate-related risks and opportunities within our investment portfolios and is committed to focusing on investments that we deem compatible with the goal of long-term value creation for our clients.

Adams Street’s ESG Committee oversees our climate-related initiatives, with Executive Committee oversight from Miguel Gonzalo, Partner & Head of Investment Strategy and Risk Management (ISRM). Yohan Hill, Director of ESG and Responsible Investing, is the Chairperson of the ESG Committee, and oversees ESG efforts, including those addressing climate-related risks and opportunities, across all investment strategies.

Taking Action on Climate-Related Risks and Opportunities

To the extent applicable for a portfolio based on its investment mandate — and in all cases consistent with our fiduciary duty — we aim to make progress in the seven areas listed below at a firm level to better address climate-related risks and opportunities:

  • Monitor and report investment exposure to transition risk and climate solutions
  • Evaluate new investments for transition risk and seek to engage active managers targeting high transition risk industries and geographies
  • Participate in relevant industry groups such as those that promote best practice in climate impact/climate solutions investing2
  • Increase reporting on exposure to transition risk and climate solutions within portfolios
  • Aim to increase the proportion of active managers that set net zero targets for their portfolio companies
  • Take steps to reduce Management Company greenhouse gas (GHG) emissions by 2030, relative to a 2024 base year
  • Support our clients’ sustainability requirements for those that are seeking targeted exposure to climate-oriented investments

Analysis

Understanding Climate Scenarios

Adams Street believes that sectors going through structural change often benefit from tailwinds that help to spur growth. These tailwinds can provide opportunities for companies to improve efficiency, grow into existing markets, and/or take share from less innovative competitors. The four major themes that Adams Street primarily invests in are software and technology enabled services, healthcare, advanced engineering and manufacturing, and changing consumer preferences. Our focus on these industries means that our exposure to carbon-intensive industries is relatively low.

Adams Street’s low exposure to carbon or energy-intensive industries means policies to promote a green energy transition in key investment markets such as North America and Europe are less likely to pose a significant financial risk to underlying investments in the medium term. Exposure to long-term climate-related policy action or technological risks for existing investments are also relatively low due to both the low carbon intensity of industries in which we invest and the typical duration of our underlying investments. However, in the long term, efforts to decarbonize the global economy — via higher taxation on carbon-intensive industries, increased subsidies for green technology, and/or shifts in customer purchasing in favor of green alternatives — will likely have a greater influence on investment decision making than is currently the case.

Our Work on Climate Scenario Analysis

Adams Street engaged Risilience, a climate analytics provider that developed out of Cambridge University’s Centre for Risk Studies, to obtain data to allow us to analyze our investment portfolios’ exposure to climate-related transition risks. Using its proprietary Earnings Value at Risk (EVTR) metric, Risilience provided quantitative financial assessments of how the transition to a low carbon economy might impact various industries across geographies under different transition pathway scenarios.

THE RISILIENCE® EVTR DATASET

Risilience’s EVTR dataset combines its transition risk modelling with publicly available financial and emissions footprint data reported by corporates to assess the expected impact on a company’s future earnings across a range of emissions pathways.

The dataset was built using future scenarios directly derived from data and assumptions from the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) and the Intergovernmental Panel on Climate Change’s Shared Socioeconomic Pathways (IPCC’s SSPs).

The EVTR dataset is generated using Risilience’s Intelligent Futures Scenario Model. The model combines climate scenarios and macroeconomic modelling to provide a forward-looking view of how carbon prices, sectoral demand, and dependencies can impact a company’s future earnings. The EVTR dataset leverages reported financial data from about 25,000 companies to develop benchmarks that represent synthetic companies from defined revenue bandings, GICS industries, and countries.

To assess the impact of Risilience’s scenarios on our investments and to identify potential exposure to future earnings risk from a low-carbon transition, Adams Street analyzed an aggregate of three broad-based Adams Street portfolios with vintage years of 2019, 2020 and 2021.3

Adams Street used data obtained from Risilience to model the EVTR for a five- and 10-year holding period under four climate scenarios. The analysis provided an aggregate view of the following underlying transition risks: policy, liability, technology and market. The analysis output helps to identify underlying investments with potential exposure to climate-related transition risk, and to evaluate for such exposure as part of our preinvestment ESG evaluations.

OPPORTUNITIES IN THE TRANSITION TO A LOW-CARBON ECONOMY

In addition to the potential risks, the transition to a low-carbon economy presents opportunities for industries and businesses whose products and services help facilitate energy transition and more sustainable patterns of production and consumption.

While Adams Street’s exposure to companies that contribute to energy transition has been relatively low historically, we anticipate that exposure to energy transition and climate solutions more broadly will continue to grow via custom mandates and our commingled products.4

MORE ABOUT RISILIENCE’S TRANSITION RISK SCENARIOS – TERMED ‘EMISSIONS PATHWAYS’

The Risilience emissions pathways used in our analysis are driven by a set of four distinct futures built on transition assumptions and data from existing scenarios. These principally are the NGFS transition scenarios and the IPCC’s SSPs. When modelling transition risks to industry groups, Risilience uses NGFS data and assumptions paired with narrative elements of the IPCC’s SSPs.

The NGFS transition scenarios are used when conducting climate risk scenario analysis, providing long-term projections for multiple transition pathways across a wide range of domains including:

  • Energy systems data, including information on how energy supply and use changes over time;
  • Economy and demographic data, providing information about how different regions of the global economy develop over time;
  • Emissions and sequestration data, showing the key drivers of positive and negative emissions;
  • Agriculture and land use, including information on land cover and agricultural output;

The table below maps the Risilience emissions pathways used in our analysis to the relevant NGFS and SSP scenarios.

It is believed that avoiding the worst consequences of climate change requires the near-halving of global GHG emissions by 2030, and a further transition towards net zero emissions by 2050, with significant reductions across the global economy as well as the adoption of CO2 removal technologies.


Figure 1: Annual CO2 Emissions by NGFS Scenario5



Figure 2: Breakdown of Annual CO2 Emissions For NGFS Net Zero 2050 Scenario5


Assessment

Evaluating Exposure to Climate-Related Transition Risk

Our findings suggest that, across the aggregate portfolio that we analyzed, exposure to investments with high climate-related transition risk is relatively low.2

Under the Paris Ambition scenario, exposure to high transition risk industry groups and geographies rises to a more significant, but still modest, proportion of underlying investments, ranging between 8% over a five-year time horizon and 10% over a 10-year time horizon. The analysis suggests that this broad-based portfolio, reflecting a blend of many high-conviction investments throughout our private markets portfolio and across all strategies within the firm, is likely to be resilient to climate related transition risk over the expected time horizon of underlying investments.


Figure 3: Breakdown of Current NAV by Five-Year Earnings Value Transion Risk Category for Different Emissions Pathways9



Figure 4: Breakdown of Current NAV by 10-Year Earnings Value Transion Risk Category for Different Emissions Pathways9


Further analysis also suggests that the largest contributor to transition risk over the 10-year time horizon under the Paris Ambition 1.5°C scenario is market risk (vis-à-vis lower demand for carbon-intensive products and services), followed by policy and technology risk. This is consistent across EVTR risk categories and geographies. Policy risk, which focuses on increased costs due to carbon pricing mechanisms as governments apply measures to increase economic incentives for sustainability, appears to be most significant under the Paris Ambition scenario in the Asia-Pacific region (including China) and technology risk most significant in North America (including the US).


Figure 5: Breakdown of 10-Year Paris Ambition Earnings Value At Risk by EVTR Category9


Figure 6: Breakdown of 10-Year Paris Ambion Earnings Value At Risk by Geographic Location9


Figure 7: Breakdown of 10-Year Paris Ambition Earnings Value At Risk by Primary Sector Classification9, 10, 11


Figure 8: Breakdown of 10-Year Paris Ambition Earnings Value At Risk by Primary Sector Classification9, 11


Risk Management

Addressing Climate-Related Risks And Opportunities

Adams Street joined the iCI in 2021 with a view to engaging with industry peers to better understand low-carbon transition among private equity-backed companies. In June 2022, we published “Quantifying Exposure to Carbon-Intensive Industries in Private Equity Portfolios”, in which we articulated our approach to assessing exposure to carbon-intensive industries in a selection of our investment portfolios.

The analysis found that exposure to carbon-intensive industries was relatively low due to our focus on software and technology enabled services, healthcare, advanced engineering and manufacturing, and changing consumer preferences. Notwithstanding this relatively low exposure, the approach of our active managers to climate-related risk forms part of our ongoing annual GP survey.

According to the findings of our most recent survey, 52% of our active managers currently implement a management approach for climate change risks and/or opportunities in their investment process, up from 46% in the prior year. Additionally, our combined pre-investment evaluation and post-investment monitoring and GP engagement facilitates a proactive approach to identifying and responding appropriately as we endeavor to mitigate climate-related transition risks within our investment portfolios.

Adams Street does not assess exposure to climate-related physical risks in underlying investments due to geospatial data limitations at the portfolio company level. Climate-related physical risks can be acute (those associated with extreme weather events, such as hurricanes and wildfires), or chronic (those associated with longer-term shifts in climate patterns, such as rising sea levels or rising average temperatures).


Figure 9: Percentage of Active GPs that Implement a Management Approach for Climate Change Risks and/or Opportunities in their Investment Process12


Figure 10: Percentage of Active GPs that Implement a Management Approach for Climate Change Risks and/or Opportunities by Sub-Class and Geography12


Metrics

Tracking Progress

The table below outlines relevant climate-related metrics for the same broad-based aggregate portfolio (of vintage years 2019, 2020 and 2021) as of 31 December 2023:13

The data support the view that underlying investments of the aggregate portfolio analyzed are in industries that have relatively low direct and indirect GHG emissions relative to revenue generation, with less than 1% of the portfolio by NAV held in investments where the primary industry classification is oil, gas and/or consumable fuels. This is reflected in the modest (medium-low) weighted-average earnings value at risk figure under the Paris Ambition scenario over a 10-year time horizon of 5.49%. This is due to the aggregate portfolio being heavily weighted towards less carbon-intense industries.

Looking ahead, Adams Street continues to review our approach to target setting and addressing the GHG emissions associated with our operations as a Management Company, and intends to report on this in future.


Disclosures / Important Notes

1. The below timeline is for illustrative purposes only and does not necessarily represent a complete list of Adams Street’s climate-related activities during the relevant period.
2. Participation does not indicate that such organizations have endorsed Adams Street, nor a guarantee that Adams Street will take any particular action with regard to ESG or climate-related issues.
3. There can be no guarantee that such portfolios are necessarily representative of other Adams Street portfolios, including those with a more directed strategy, and analysis conducted on such portfolios may result in substantially different results.
4. There can be no guarantee as to the composition, characteristics or attractiveness of future investments.
5. Source: NGFS Phase 4 Scenario Explorer, REMIND-MAgPIE 3.2-4.6 – https://www.ngfs.net/ngfs-scenarios-portal/data-resources/
6. The categories and thresholds listed here are subject to change.
7. The definitions listed here should be considered a summary, are not intended to be complete, are subjective and represent Adams Street’s current views of such risk categories; provided, however, that such views may be informed by Risilience and are subject to change.
8. Represents current stated policies and goals of certain non-governmental bodies which are subject to change. Adams Street expresses no belief regarding the appropriateness of such policies or metrics.
9. Based on the Risilience EVTR dataset and Adams Street data for an aggregate of three recent broad-based Adams Street portfolios with vintage years of 2019, 2020 and 2021 as of 31 December 2023. There can be no guarantee that such portfolios are necessarily
representative of other Adams Street portfolios, including those with a more directed strategy, and analysis conducted on such portfolios may result in substantially different results. These models make material future assumptions. There can be no guarantee that such assumptions represent the complete range of possibilities, that such assumptions will prove accurate or that Adams Street’s portfolio will not experience greater or lesser variability than predicted.
10. The Risilence EVTR model dataset focuses on the real economy and does not include analysis of the impact of different emissions pathways on the financials sector. As such, underlying investments in portfolio companies with financials as their primary industry classification have not been included in this EVTR scenario analysis exercise.
11. The financials sector accounts for approximately 13.6% of the aggregate portfolio NAV as on 31 December 2023.
12. Source: Adams Street 2023 ESG survey (n=223)
13. There can be no guarantee that such portfolios are necessarily representative of other Adams Street portfolios, including those with a more directed strategy, and analysis conducted on such portfolios may result in substantially different results.
14. See Quantifying Exposure to Carbon-Intensive Industries in Private Equity Portfolios for explanation of methodology.
15. While the financials sector is not included in scope of the EVTR analysis as previously mentioned, it is included as part of the WACI calculation.


Important Considerations: This information (the “Paper”) is provided for educational purposes only and is not investment advice or an offer or sale of any security or investment product or investment advice. Offerings are made only pursuant to a private offering memorandum containing important information. Statements in this Paper are made as of the date of this Paper unless stated otherwise, and there is no implication that the information contained herein is correct as of any time subsequent to such date. All information has been obtained from sources believed to be reliable and current, but accuracy cannot be guaranteed. References herein to specific sectors, general partners, companies, or investments are not to be considered a recommendation or solicitation for any such sector, general partner, company, or investment. Past performance is not a guarantee of future results. Projections or forward-looking statements contained in the Paper are only estimates of future results or events that are based upon assumptions made at the time such projections or statements were developed or made. There can be no assurance that the results set forth in the projections or the events predicted will be attained, and actual results may be significantly different from the projections. Also, general economic factors, which are not predictable, can have a material impact on the reliability of projections or forward-looking statements. Adams Street Partners, LLC is a US investment adviser governed by applicable US laws, which differ from laws in other jurisdictions