Clarissa Drysdale-Anderson, Partner at ERM and Adinah Shakleton, Managing Director, Head of Sustainability at Permira, a global investment firm, explore how the “Valuing carbon pre-investment” guidance by the Private Equity Taskforce of the Sustainable Markets Initiative (PESMIT) can help investors integrate carbon valuation into pre-investment due diligence. In this article, “carbon” and “climate” are used interchangeably as umbrella terms, encompassing all greenhouse gases and their carbon emission equivalent. As carbon becomes an increasingly important factor in private equity investment decisions, Clarissa and Adinah highlight its practical applications, the challenges of valuing it in investment decision-making, and its evolving role in driving long-term enterprise value and performance improvement.
1. ERM and the Private Equity Taskforce of the Sustainable Markets Initiative (PESMIT) have published guidance for the valuation of carbon in the context of pre-investment. Can you explain PESMIT’s objectives and the purpose of the pre-investment guidance?
Clarissa Drysdale-Anderson
Carbon costs and opportunities are not consistently considered in asset valuations, especially in private markets. However, with increasing climate targets like net-zero by 2050, regulatory changes, value chain pressures, and shifting consumer and investor demands, carbon-related financial impact is becoming increasingly important.
Published in September 2024, “Valuing carbon pre-investment” was developed by the climate change working group of PESMIT, building on the 2023 “Valuing carbon in private markets” publication. The publication is driven by a critical need within private markets: to effectively integrate carbon-related risks and opportunities into investment decision-making. While designed for use during due diligence, the guidance and considerations can also be applied post-acquisition in seeking to quantify financial value.
Recognizing the diversity of private equity portfolios, the guidance enables firms to tailor carbon valuation approaches by sector, geography, and data availability, providing a practical entry point for firms at different stages of monitoring and measuring climate-related aspects.
With the acceleration of the energy transition, the expansion of carbon markets, and heightened stakeholder expectations, it has become increasingly important to understand and price carbon effectively. The guidance helps translate carbon risks and opportunities into financial terms, such as adjusted EBITDA and valuation impacts, enabling firms to better align with investor expectations and navigate a rapidly evolving regulatory and market landscape.
2. Why is carbon valuation an important topic to private equity firms?
Adinah Shackleton
This is an important topic for several reasons. At Permira, our focus is on delivering long-term value to our funds’ investors. In the transition to a low-carbon economy, quantifying the climate risks and opportunities for any company in which our funds invest is an important part of our overall integrated investment approach.
Portfolio companies face different climate-related pressures and considerations from various different stakeholders including customers, employees, investors, and regulators. Climate considerations may present tangible risks and opportunities to these businesses including exposure to regulated carbon price mechanisms, energy efficiencies and alignment with clients’ climate ambitions e.g., contractual agreements to set Science-Based Targets.
The “Valuing carbon pre-investment” publication provides practical guidance for private equity firms to navigate this landscape effectively and to support the quantification of these climate risks and opportunities, pre-investment.
Clarissa Drysdale-Anderson
At ERM, we see carbon valuation as an important tool for helping private equity firms navigate an increasingly complex landscape. With carbon pricing and emissions regulations tightening globally, assessing carbon liabilities during the pre-investment due diligence is essential to mitigating future compliance costs and regulatory risks.
Our work with private equity clients shows that carbon intensity can materially impact the valuation of portfolio companies, particularly in the energy, manufacturing, and transportation sectors. In addition, decarbonization itself is emerging as a compelling investment thesis. Investors are increasingly recognizing the strategic value of acquiring higher carbon-intensity businesses with the intention of implementing low carbon transformation plans. This approach not only helps manage climate-related risks but also unlocks opportunities for value creation. Early consideration of carbon and climate topics can be a lever for operational efficiency, and new revenue streams like carbon credits can also play a vital role in long term business resilience.
By embedding carbon into scenario planning, firms can better anticipate climate-related risks and adapt investment strategies accordingly. This forward-looking approach strengthens performance, enhances brand reputation, and can improve portfolio companies’ competitor market positioning for exit, as buyers place increasing emphasis on sustainability in their acquisition decisions. Moreover, by demonstrating how they are systematically integrating carbon valuation into investment assessments, firms can better position themselves to attract capital from sustainability-focused limited partners and institutional investors.
3. Describe how you have integrated the PESMIT guidance into your due diligence process.
Adinah Shackleton
We have sought to quantify potential carbon liabilities and opportunities in relation to financial metrics, such as EBITDA, revenue, and enterprise value. We believe this is an effective way for us to preserve or create long-term value with alignment and support from management teams.
We have taken steps to integrate key aspects of the PESMIT guidance into Permira’s standard due diligence processes for our private equity investments, including for all signed private equity deals since January 2024 (statement correct at the time of publication, September 2025). We tailor the approach by portfolio company and focus primarily on two topics. Firstly, the potential exposure to regulated carbon pricing mechanisms such as emissions trading schemes and carbon taxes. Secondly, alignment between the portfolio company and its clients’ climate ambitions, where this is relevant.
Permira has also applied a similar approach with selected portfolio companies during its ownership, to help assess the potential business case for decarbonization and identify value creation opportunities. As one example, we supported a high-emitting portfolio company to assess its climate-related risks and opportunities using elements of the PESMIT framework, including regulated carbon pricing mechanisms and alignment to clients’ climate ambitions. As a result, the management team has taken steps expected to preserve and enhance value, including committing to set Science-Based Targets and developing a decarbonization plan.
Clarissa Drysdale-Anderson
ERM has, for a long time, helped its private equity clients understand the impacts of climate and carbon on potential investments. The PESMIT guidance has enabled ERM to systematically provide operational and strategic analysis that identifies the most transaction-relevant carbon considerations, ensuring that they are communicated to deal teams and built in from the outset.
We have helped firms adjust financial metrics such as EBITDA to reflect carbon costs and savings, and model how performance against carbon targets could affect exit valuations. These carbon-related insights are now often included in our client’s Investment Committee memos, integrating carbon exposure and mitigation plans as part of the go/no-go and valuation criteria.
By adjusting financial metrics to reflect carbon, the approach ensures continuity into the ownership period, integrating the most material topics into management team engagement and value creation plans, setting KPIs and tracking performance. In addition, the PESMIT guidance approach provides the opportunity to link management compensation or valuation plans to performance against carbon targets.
4. What opportunities and challenges have you faced while valuing carbon in private equity investment decisions? And how are you balancing carbon pricing with other risks and opportunities identified in the pre-investment phase?
Adinah Shackleton
Permira considers carbon risks and opportunities at the portfolio company level alongside other value drivers, ensuring that they are evaluated in a similar way to other financial, operational and market risks.
Quantifying the business case for decarbonization pre-investment can help to accelerate momentum on climate-related value creation activities once the transaction has signed during ownership, e.g., identifying energy reduction initiatives and alignment with clients’ climate ambitions.
When assessing a company’s climate risks and opportunities, we recognize that granular data can sometimes be challenging to collect, particularly pre-investment. Where data gaps exist, we apply conservative assumptions, and post-investment, we aim to support portfolio companies in refining the analysis to drive targeted initiatives that can preserve and enhance value.
Clarissa Drysdale-Anderson
A key challenge that ERM frequently encounters is limited data availability and quality within the tight timeline of a transaction. As an example, we see a lot of companies in the mid-market that lack reliable Scope 1, 2, and 3 emissions data.
The absence of standardized valuation models and the volatility of future carbon prices adds complexity to scenario planning, with investment professionals often requiring training to incorporate carbon data into financial analysis. The PESMIT guidance provides direction on estimates where information is not available and helps investment professionals to integrate carbon into financial analysis.
While translating carbon risks into financial terms remains a challenging but developing practice, the PESMIT guidance has proven valuable for private equity firms during due diligence. By treating it as a directional tool, we have helped firms gain meaningful insights into carbon exposure and balance these alongside other strategic, financial, and regulatory risks during pre-investment assessments.
5. What are some lessons learned or best practices you can share with other private equity firms considering implementing the PESMIT guidance?
Adinah Shackleton
During the PESMIT guidance development, we tested and piloted the guidance alongside several other Private Equity Taskforce member firms. We found that each private equity firm had its own focus areas reflecting its industry sectors, geographies, and level of carbon-related ambition. The guidance was refined to enable private equity firms to include or exclude specific climate risks and opportunities, where relevant.
We have tailored our approach at Permira to acknowledge the typical profile of the funds’ portfolio companies. While most of the funds’ portfolio companies do not have material direct exposure to regulated carbon pricing today, our approach allows us to reflect for how this exposure may change over time and to assess potential exposure to pass-through costs from supply chains with evolving carbon pricing regulations.
At Permira, we have found that tailoring the approach to a sector’s material risks and engaging early with investment teams and management helps to build buy-in for decarbonization measures post-investment. This has enabled us to accelerate our engagement with portfolio companies on activities such as energy efficiency plans and setting Science-Based Targets.
Clarissa Drysdale-Anderson
Carbon valuation is not one size fits all. Customizing the approach based on sector and geography is essential for meaningful insights - for example, what is material for a logistics company may be irrelevant for a software-as-a-service business.
Carbon risks and liabilities may significantly affect valuation, so applying a materiality approach tailored to the business can help avoid overpaying. In addition, given common data gaps, it’s important to allocate time and resources for proxy modeling (i.e. models used to estimate expected returns or risk exposures) during due diligence.
Upskilling investment teams and providing practical tools are essential to build buy in and overcome resistance to ESG integration. With climate-related regulations and expectations evolving rapidly, firms must remain agile and continuously adapt their approach to stay ahead.
6. Looking forward, how do you see the role of carbon valuation evolving in private equity?
Adinah Shackleton
Quantifying climate risks and opportunities during the investment lifecycle can help to preserve and enhance the long-term valuation of a business. At Permira, we are continuing to build our capabilities and knowledge in these areas, supported by the progress and what we have learnt across the Permira portfolio. Permira is pleased to have contributed to the wider private equity industry’s focus and rigorous approach on this topic. We are committed to evolving and enhancing our practices as we continue to learn, alongside the wider industry.
Clarissa Drysdale-Anderson
At ERM, we see carbon valuation evolving from a risk mitigation tool to a lever for value creation. Beyond managing regulatory risk, it will increasingly help to identify upside opportunities such as green premiums, carbon credit monetization, and climate-aligned innovation.
The adoption of global frameworks like the International Financial Reporting Standards (IFRS)/International Sustainability Standards Board (ISSB), Partnership for Carbon Accounting Financials (PCAF) and GHG Protocol will continue to bring much needed consistency to carbon accounting. As methodologies mature, carbon pricing will become a standard input into core financial models such as discounted cash flows (DCF’s), internal rate of return (IRR) calculations, and exit scenarios, supported by internal shadow pricing.
With advances in artificial intelligence, real-time data, and growing regulatory and LP pressure, carbon valuation will influence everything from deal sourcing to post-acquisition transformation. For private equity firms, building robust carbon valuation capabilities is becoming a defining feature of competitive, future-ready investing.
