Beyond Carbon - Climate Transition Risks in European Private Equity

Introduction

Most European private equity funds are not heavily exposed to carbon intensive sectors. In H1 of 2023, around a third of all European private equity transactions were in the Services sector. The Software & Technology and Consumer sectors also took large proportions of total dealflow. Most companies in these sectors are neither carbon intensive nor especially asset-heavy.

As a result, their climate risks are often overlooked.

European private equity investors are familiar with climate risks. Over the last few years, many funds have invested in tools and processes to understand the risk that climate events might pose to physical assets - floods, wildfires, and so on.

Transition risks like policy, technology, and legal changes related to climate change are considered too, but with less consistency. Investors have assumed that transition risks grow in proportion to the carbon intensity of a business. High emitting sectors like Utilities and Transportation are assumed to face the greatest transition risks because of their exposure to climate policies, technology substitution, and so on.

As we enter the last productive weeks of 2024, the private equity industry sits atop record amounts of dry powder. Consensus suggests that 2025 will see private capital deployed at speed and scale. But from a climate perspective, there is a caveat to this good news. The industry will be ramping up deployment at a time when:

• The climate policy environment is unstable
• Corporate climate litigation is increasingly common
• Consumers are sensitive to brands' reputations on climate issues
• Supply chains are adapting to transition technologies and to policies like CBAM

As this report explores, these transition risks are material, often over shorter timeframes than their physical climate risk counterparts. It is important to track and manage them, because no funds are entirely immune. Even investors into climate solutions may find that they have some exposure. The US election underlined this: there are many climate solutions providers that are heavily exposed to IRA repeal; tariffs on renewables supply chains; and shifting rhetoric about the urgency of climate action.

This report identifies climate risks in European Private Equity portfolios that may be overlooked. It presents case studies of climate transition risks affecting the Services, Consumer, and Software & Technology sectors and outlines how investors can understand and manage these risks more effectively.

Sector profiles

This report looks at climate transition risks affecting the Services, Consumer, and Software & Technology sectors.

Specifically, we pick case studies in the Building & Engineering Services; Packaged Food; and Software for Transition Industries subsectors. Each subsector has seen one or more significant transactions in the last year, and each faces material transition risks of different types.

These subsectors come from the classification framework used across Unwritten's climate risk analysis, which was custom-built to accurately represent the impact of the climate transition on different sectors. The framework currently incorporates ~100 sectors with unique exposures to the climate transition, across 200 jurisdictions.

Below, we show an aggregate view of Technology, Market, Litigation, Policy, and Reputation risks in each subsector. (See the appendix to this report for a brief explainer on these different categories of transition risk.)

Risks for Building & Engineering Services firms are driven by 1) complex supply chains and 2) local policies for decarbonising real estate. Innovative green technologies also have disruptive potential.

Packaged Food companies face climate reputation and litigation risks from retailers diligencing supply chains for compliance with their sustainability targets. Companies selling directly to consumers face potential reputation risks as European customers become both more conscious and more sceptical of brands' climate claims.

Companies providing Software for Transition Industries benefit from large anticipated growth in their total addressable market. This could come at the expense of non-agile providers serving declining markets.

Services - Building & Engineering Services

Climate risk for Building & Engineering Services (B&ES) firms is driven by 1) market risks resulting from complex supply chains and 2) the impact of local policies intended to decarbonise real estate.

Market Risk

Scenario analysis indicates that climate change could push the price of key cost centres up by a third for Building & Engineering Services firms - which typically operate with very narrow margins.

This is the result of rising prices for the energy products used for operations and transport. Another driver is the price of metal products used in construction and renovation. These could increase by 15% compared to the base case, as carbon prices and other policy costs are passed through.

Figure: Climate-Sensitive Costs Growth vs. Base Case (2025–2035). Series: Fossil Fuel-Based Transportation, Metals, and Oil under Net Zero 2050 and NDC scenarios. Oil (Net Zero 2050) rises most steeply to just over 30% by 2035; Metals (Net Zero 2050) reaches ~16%; Fossil Fuel-Based Transportation (Net Zero 2050) reaches ~20%. NDC scenarios stay much flatter, with Oil (NDC) turning negative after ~2032.

Price movements underscore the need to gradually transition from high carbon steel towards low carbon alternatives, including recycled steel, green hydrogen-based steel production, or innovative construction materials. This shift is crucial to reduce sectoral vulnerability to rising carbon costs and ensure alignment with long-term decarbonisation goals.

Further mitigating actions include investing in energy efficiency and renewable energy solutions. This includes pivoting to fuel-efficient vehicles or EVs for operations and transportation.

Policy Risk

Policy risk poses the largest threat to B&ES, driven by a complex climate policy landscape. Over the last five years, the rate of global climate-related policymaking has made it challenging for investors to track relevant legislation, especially for companies with significant operations across multiple jurisdictions. In Europe, 33 new climate-related policies have been enacted since 2023.

Case Study: Germany's Climate and Transformation fund (KTF)

The climate policies that present the most obvious risks are familiar acronyms like CBAM - or, for Unwritten's audience, disclosure rules like CSRD. But climate policies can bring tailwinds too. Within B&ES, Germany's Special Climate and Transformation fund (KTF) stands out among the 184 total climate-related policies in place across Europe. The fund was established at an initial €170 billion, with federal funding for the Building Sector representing one of its four primary programmes. Its intention is to foster the uptake of lightweight construction technologies and capitalise on their role in climate protection and the energy transition.

However, the German government has been criticised for failing to use dedicated funds to their full extent. Support for the modernisation of buildings to make them more energy efficient was heavily underused because “systemic refurbishment measures were delayed”.

Consumer - Packaged Food

Packaged Food businesses have seen growing inflows of private capital from across Europe in recent years. But companies in this subsector face significant climate reputation and litigation risks - both from consumers and from retailers diligencing supply chains for compliance with their own sustainability targets.

Reputation Risk

Reputation risks are hard to quantify. Intuitively they are most acute for businesses selling directly to the consumer, but they can also be passed along the supply chain (e.g., Amazon setting standards and targets in its supply chain).

Other relevant factors are Sectoral Trust (i.e., how sceptical consumers tend to be about the sector in general) and Climate Awareness for a given country (i.e., how informed and concerned consumers in a particular jurisdiction tend to be about climate change in general).

Take IRCA (acquired by Advent in 2022) as an example. IRCA is a leading Italian producer of specialty ingredients for artisanal pastries, cakes and gelatos. It scores highly in all three predictors of climate reputation risk:

IRCA has not experienced any climate reputation risk to date - only indirect physical risk, in the form of high cocoa prices driven by poor harvests in West Africa. But the implication is that it must be especially proactive in managing its communications and procurement practices in relation to climate.

Litigation Risk

Packaged Food businesses are also contending with a growing number of climate-related lawsuits globally. Climate litigation typically falls into one of three categories:

Climate litigation in the packaged food sector has historically focused on large public companies, as the graphic below shows. But as climate litigation in general becomes more common, privately held assets are also likely to be targeted.

Mitigating actions include proactive screening, both to see if a target is the subject of lawsuits itself and to understand litigation patterns. Strategic asset selection is also an option, i.e., identifying undervalued targets with litigation or compliance issues that can be resolved post-acquisition.

Figure: World map - climate lawsuits in the packaged foods sector in the last five years. Companies indicated include JBS, Coca-Cola, Danone (multiple jurisdictions), The Pack, and HiPP. Markers distinguish 3x climate-related litigation cases, 1x climate-related litigation case, and nations where litigation was filed.

Case Study: ClientEarth, Surfrider Foundation and Zero Waste v. Danone (2023)

NGOs ClientEarth, Surfrider Foundation Europe, and Zero Waste France sent a notice of intent to sue Danone, claiming the company does not adequately address plastic pollution risks. The notice claims Danone violated the law of duty of vigilance; incorporated in articles L.225-102-4 and 225-102-5 of the French Commercial Code.

ClientEarth claim that the company, amongst the top 10 biggest plastic polluters worldwide, uses too much plastic and has never adopted adequate measures to address the harms present throughout its supply chain. The NGOs claim an injunction to force the company to:

1. Map the impacts of plastic use on the environment, climate, health, and human rights from production to end-of-life.
2. Provide a complete assessment of plastic footprint, including plastics used in production, logistics, promotions, and packaging.
3. Establish and act on a 'deplastification' plan with quantified and dated objectives.

A decision on the matter is pending.

Software & Technology - Software for Transition Industries

Mark Carney described the climate transition as “the greatest commercial opportunity of our time.” In the final section of this report, we highlight an area where the transition drives significant opportunity as well as risk: companies providing Software for Transition Technologies. Examples include providers of grid management systems, operational software for renewable power generation, and tailored applications of AI.

The chart below shows demand growth for software enabling the transition under different scenarios, compared to a base case:

Figure: Demand Growth Rate vs. Base Case (2025–2035). Series: below2, nz2050, ndc, delayed. nz2050 rises most steeply to just over 30% by 2035; ndc and below2 track closely, reaching ~21%; delayed stays flat at 0% until ~2030, then rises to ~8% by 2035.

The data represent the growth of demand in the economy as a whole rather than growth prospects for any specific company (which may be much greater). It is significant that the NDC and Below 2C scenarios do not really diverge, suggesting that demand may grow sharply in the next decade even in a relatively slow transition.

Of course, Software for Transition Industries is a relatively new market and capitalising on the opportunity requires thoughtful timing and positioning, typically in geographies with strong regulatory support and good start up ecosystems. But it is worth noting that pure software companies are not the only viable targets, since companies in industrial subsectors with strong R&D capabilities may also end up meeting some of the demand.

Technology Risk

Obviously, growing demand for transition-enabling software is a knock-on effect of the huge technology shift already underway in the energy sector. The climate crisis is a technology crisis. The energy sector - which underpins the supply chain for every product and service - is changing fundamentally, and every sector will be affected. In some sectors these effects are direct (ICE to electric vehicles); in others they are indirect or manifest as market risk and opportunity.

In general, technology-related climate risks can be categorised as follows:

Returning to the example of Software for Transition Industries: adding Software for Non-Transition Industries and Software (General) clearly shows the impact of substitution risk in the sector. Net demand for software grows only slightly over the decade; all of the remaining growth in the Software for Transition Industries sectors is met with corresponding demand decline in companies providing software for non-transition industries.

Figure: Demand Growth Rate for Software Industries vs Base Case (2025–2035). Series shown for Software (General), Software for Non-Transition Industries, and Software for Transition Industries under ndc and below2. Software for Transition Industries rises to ~+14; Software for Non-Transition Industries declines to roughly −11 to −18; Software (General) stays close to flat (0 to +3).

Appendix - Transition Risk Guide

Climate change is rewiring the global economy. The transition involves fundamental changes to almost every sector and supply chain - changes which are well underway and continue to accelerate. These risks are typically broken out into the subcategories of reputation, litigation, policy, technology, and market. The first three - litigation, policy, and technology - are perhaps better termed “exposures” rather than “risks”, since they could in principle be positive as well as negative (e.g., a tax incentive policy for a green technology).

Transition risks are driven by both mitigation (efforts to reduce greenhouse gas emissions to limit the severity of climate change) and adaptation (efforts to adapt to the impacts of climate change), meaning that they are material regardless of the speed or stringency of the transition.

Policy Risk

Policy actions around climate change continue to evolve. Their objectives generally fall into two categories: 1) policy actions that attempt to constrain actions that contribute to climate change, and 2) policy actions that seek to promote adaptation to its effects.

Reputation Risk

As public awareness of climate change grows and more consumers experience extreme climate events, consumers are increasingly likely to weight their perceptions of a company's climate profile in their purchasing decisions. Reputation risks tend to be most acute for businesses selling directly to the consumer, although they can also be passed along the supply chain (e.g., Amazon setting standards and targets in its supply chain).

Technology Risk

The climate crisis is a technology crisis. The energy sector - which underpins the supply chain for every product and service - is changing fundamentally, and every sector will be affected. In some sectors these effects are direct (ICE to electric vehicles); in others they are indirect (better insulation technology for real estate), or manifest as market risk (the rising demand for transition metals). The timing of technology development and deployment, however, is a key uncertainty in assessing technology risk.

Litigation Risk

The last decade has seen a marked increase in climate related litigation claims being brought by property owners, municipalities, states, insurers, shareholders, and public interest organisations. Claims include the failure of organizations to mitigate the impacts of climate change, the failure to adapt to climate change, and the insufficiency of disclosure around material financial risks.

Market Risk

Markets are affected by the transition in a huge range of ways. Impacts range from supply chain disruption caused by extreme weather events; to higher costs for carbon intensive products such as steel as carbon taxes are passed through to customers; to cheaper power; to shifting demand for services (e.g., car repairs) and products (e.g., electric heating systems).

Using scenario analysis for climate risk assessment

Principles for use

• Scenario analysis is the process of estimating the expected value of a company, asset or portfolio over a given period of time, assuming important changes take place in the surrounding economic environment.
• Scenario analysis is not the same as forecasting, where data is used to make predictions about the future.
• Scenario analysis is commonly used to estimate changes to a company, asset or portfolio's value in response to external events and may be used to examine hypothetical best and worst-case scenarios.
• The purpose of performing scenario analysis is to help investors to make better decisions by testing assumptions about the future.

NGFS climate scenarios used for this report

• Net Zero 2050: Net Zero 2050 goals and 1.5C target by 2100 are achieved efficiently.
• Delayed 2C: Governments only start acting after 2030 and have to catch up.
• Below 2C: An efficient, steady, and persistent increase in policy intensity.
• Nationally Determined Contributions (NDCs): Countries meet their existing pledges.
• Current Policies: A base case where governments implement no additional targets or increase ambition versus the present day.

Figure: Relative magnitude of transition and physical climate risk levels by scenario (Transition Risks vs. Physical Risks). Approximate positions - Delayed Transition: high transition / medium physical; Net Zero 2050: medium-high transition / low physical; Below 2C: medium transition / low-medium physical; NDCs: low transition / medium-high physical; Current Policies: low transition / high physical.

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Affiliations shown: IIGCC; PRI (Principles for Responsible Investment); Stanford University; University of Oxford; London Business School.