Net zero reporting: ‘inaction’ not an excuse for data inconsistency in private markets

As the threat of climate change draws closer, institutional investors are sharpening their focus on the financial impact of climate change in their private markets’ portfolios.

Even though climate-related risks affect all areas of an investor’s portfolio, net zero reporting on private markets assets can prove difficult due to data inconsistency and the lack of transparency from participants, such as private equity firms.

This has been a growing challenge, particularly for investors who plan to increase their allocations to private markets such as the UK's Local Government Pension Scheme (LGPS) pools. 

Some LGPS pools have opted to monitor net zero progress in-house, while others, such as ACCESS have outsourced it entirely.

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The £35bn Brunel Pension Partnership applies a combination of both. While Hermes has been appointed for its voting and engagement mandate in listed markets, the pool still plays an active role in stewardship, including in private markets.

Nick Gray, portfolio manager for private debt at Brunel, argues that transparency in private markets is improving.

“In the past, small- and medium-sized private companies have not generally felt much investor pressure to monitor and report things like diversity statistics or carbon-related information. It has not been something prioritised by management, but that is changing as private equity sponsors and finance providers (such as direct lenders) apply pressure to prioritise these issues.

“The industry is still not where we want it to be, but the trajectory gives me hope that responsible investment-related monitoring and reporting will meaningfully improve in the coming months and years,” Gray explains.

Brunel, which manages the assets on behalf of ten LGPS funds, has private markets portfolios that cover property, infrastructure, secured income, private debt and equity. Like Brunel, other pension pools such as London CIV have an internal function to assess the climate impact of its investments.

'Inaction' not an excuse

The £26bn London CIV has several funds within private markets including infrastructure, private debt, real estate and housing, with its biggest fund being within renewable infrastructure and sized at nearly £1bn.

Speaking to Net Zero Investor, Jacqueline Jackson, London CIV’s chief sustainability officer, argues that “in private markets, data inconsistency is not an excuse for inaction”.

To measure the net zero ambitions and impact of private markets the LGPS pool for 32 funds employs a layered approach, specifically focussing on governance. “Assessing whether managers are Task Force on Climate-Related Financial Disclosures (TCFD) signatories and questioning whether they demonstrate strong environmental, social and governance (ESG) leadership,” Jackson explains.

London CIV does this in two ways: “First, in the manager selection process we undertake due diligence, including ESG factors, which forms the basis of our decision. Second, we perform quarterly monitoring, tracking progress through regular updates on ESG activity, investments, and for some assets, emissions data, looking for trends and improvements.”

Jackson adds that London CIV forms a basis of its assessment of managers in different ways including ESG factors, integration of ESG into investment decisions as well as design and how the manager engages with assets to maximise ESG opportunity.

Pushing for better reporting 

However, “data availability” across private markets is not as consistent or disclosed as much as it is within public markets, with firms net zero commitments remaining low.

Jackson argues that through “proactive stewardship” investors can “push for better reporting”, such as through TCFD advocacy.

“We encourage TCFD and Taskforce for Nature-related Financial Disclosures (TNFD) adoption across the industry, setting clear expectations for comprehensive climate-related disclosures.

“We also monitor how many of our investment managers are TCFD signatories and report on this annually. Whilst we understand that our reporting is much more consistent in public markets, due to data availability, we are currently undertaking more targeted engagement, which we believe will enable us to eventually collaborate with managers on improving data collection and reporting.

“Finally, where we have capacity, we try to join industry collaborations, working with leading bodies to develop more standardised metrics or reporting frameworks.”

Successful engagement 

Jackson explains that several of London CIV’s portfolio companies have set net zero targets and disclosed emissions on the back of successful engagement with London CIV and its managers. “For example, last year having completed a carbon emission audit Reden Solar made excellent progress putting in place a net zero plan by the end of the year within the London CIV Infrastructure Fund.”

Similarly, London CIV has also influenced managers’ progress on climate risk. “Equitix commenced a portfolio-level climate risk, vulnerability, and resilience exercise to develop its climate framework in line with the recommendations and other managers such as Brookfield has published its annual sustainability report, including its inaugural TCFD disclosures.

“Brookfield finalised its updated screening-level risk assessment, which utilised transition and physical scenarios to provide a view of the potential climate risks and opportunities across its business, as well as the resiliency of its business across different future warming intensities,” Jackson continues.

Push on portfolio companies 

Adding to Jackson’s point, Gray states that to overcome the shortfall in data the “push must be for portfolio companies to start measuring, monitoring, and reporting responsible investment-related data themselves”.

“To make up the shortfall, we have seen managers use proxies such as public market comparables for estimating carbon intensity, especially when reporting is patchy or not even there.

“Brunel can influence managers in several different ways, but what I like most of all is that Brunel prefers engagement rather than unquestioning divestment.”

Gray explains that Brunel has been doing this with a US manager over the last six months to improve its responsible investment programme.

“We have quarterly calls to talk through progress against an agreed set of milestones. Whilst the manager is still not as strong as some of the other managers in the portfolio, what I like is that they are on the right trajectory, and they are really willing to engage and improve,” Gray continues.

Monitoring managers' engagement 

Unlike Brunel and London CIV, some investors outsource climate reporting and engagement to their managers. 

An example is the University of Cambridge Investment Management (UCIM), the manager of the £4bn Cambridge University Endowment Fund (CUEF).

Compared to pension funds, the endowment has a relatively high allocation to private markets, as Honor Fell, sustainable investment officer at UCIM explains. “Private equity is a key asset class for UCIM and we have been working with asset managers to request carbon footprint data in the first instance and then taking steps to reduce portfolio emissions,” she states.

Currently, 28 fund managers or one-third of the CUEF portfolio are reporting on climate emissions.

“We have seen meaningful improvements over the past three years, including industry initiatives such as the initiative Climat International (iCI), ESG Data Convergence Initiative (EDCI), ESG_VC and VentureESG taking off.

“We have also been very encouraged to see asset managers moving on from measuring emissions to working with portfolio companies to set science based targets,” she highlights to Net Zero Investor. 

This article first appeared in the Room151 Private Markets Profile which can be accessed here