Changing weather: putting climate at the heart of investment strategy

Asset managers are under pressure, from regulators, investors, employees and customers, to up their game on climate risks – and opportunities.

“Climate risk is a very serious risk for all investors, in particular, the private equity community,” says Mike Hayes, Global Renewables Leader at KPMG. Climate risk is the exposure of companies across the world to both the physical risk of climate and transition risk – and the change in customer sentiment and regulations that will impact assets.

One large global asset management player that has stood up and taken notice is Apollo Global Management, Inc.. With some $523 billion assets under management, Apollo has a significant global footprint.

“In today’s marketplace, every financial firm, every alternative asset manager, is sought out as an advisor not just for investment but for advice on where the future’s going. Considering carbon and climate in our investments, our investors are looking for us to be sophisticated in this space, and our employees. too,” says Dave Stangis, Chief Sustainability Officer at Apollo Global Management.

Apollo has a long history of integrating ESG principles in its investing approach to drive positive environmental and social impact while creating value for its clients, investors and shareholders. But it recognised that there was an opportunity to strengthen its approach even further; it needed a comprehensive climate strategy that would inform every aspect of its business – from fundraising, to capital deployment and risk monitoring across investment portfolios.  

Apollo approached our climate risk team at KPMG to help it take its climate-related investment strategy, governance and processes to the next level.

“The challenge for Apollo wasn’t just figuring out how to improve a climate strategy, it was how do you implement that strategy,” explains Mike Hayes. “And then how do you make it real to engage at a corporate level but also down at the portfolio company level?”

That made it essential that the whole business was involved in putting the new climate strategy together. “We involved more than 75 different individuals from different parts of the businesses, from senior partners to content experts, from our yield business, all the way to private equity,” says Dave Stangis. “It really involved education, getting everybody on the same page. And KPMG did a great job of connecting the dots and drawing learnings throughout the process.”

“Getting buy-in right from the top of the house to provide governance is essential." – Bridget Beals, Co-Head of Climate Risk and Strategy, KPMG in the UK.

Our KPMG team devised a three phased approach to support Apollo:

Maturity assessment. We established a baseline of Apollo’s climate-related business practices at corporate level and across business segments. We assessed this in relation to three key market forces: investor preferences; regulatory requirements; and peer activity.

Climate ambition. We worked with senior stakeholders across the firm to build consensus around climate ambitions at corporate and business segment levels.

Strategy development. We identified and assessed the feasibility of various decarbonisation levers, including investment into low-carbon products and assets. From here, we developed a full roadmap for implementation of the plan. 

KPMG provided Apollo with a detailed report analysing the firm’s present status,  assessing the emissions of certain investment portfolios, and identifying potential decarbonisation opportunities. This helped Apollo formulate its climate ambitions together with a roadmap at the group and business segment levels.

Coming out of this comprehensive engagement, Apollo has committed to:

• reduce median carbon intensity by 15% over the projected hold period for new majority equity investments in the firm’s flagship strategy
• align its public reporting with the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations
• enhance its due diligence with a deeper focus on sustainability improvements and targets
• continue to identify and invest in innovative companies that accelerate the energy transition and more sustainable business models.

Apollo has begun to embed these ambitions into BAU processes, including upskilling deal teams on climate and enhancing climate considerations within the pre-investment due diligence processes. 

Crucially, we didn’t only focus on the risks of climate change but promoted thinking around the opportunities, too.

“We keep talking about the risk side of climate – but we should also talk about the opportunity side.” – Mike Hayes, Global Renewables Leader, KPMG International

With the Apollo engagement, KPMG believes we were able to demonstrate the vast array of new investment opportunities that are emerging due to climate change, including technologies such as mobility, sustainable finance, and new business models. We at KPMG see opportunity in high-potential asset classes for investment that could produce returns as well decarbonising  investment portfolios.

“The world is transitioning to a revolutionary way of doing business – a low-carbon way of doing business,” says Mike Hayes.

Apollo is now better positioned to meet the expectations of is regulators, customers, and suppliers.

“We are building better businesses that perform better from a sustainability perspective, and we believe they'll perform better from a financial and economic perspective as well.” – Dave Stangis, Chief Sustainability Officer, Apollo Global Management

The work on climate risk and opportunity that Apollo is undertaking is designed to benefit investors and  stakeholders alike. “Our employees are looking for us to lean into energy transition and sustainable investments. We believe we will attract better talent and  retain better talent,” says Dave Stangis. “And our investors have higher expectations around climate investing, climate due diligence and disclosure. We're meeting those needs as well – both in the public markets, for our shareholders, and in the private markets for our clients and LPs.”