Managers warned they will lose asset owner clients if they don’t raise their ambition.
Private markets’ asset managers are “not up to speed” on integrating climate considerations into investment decisions, prompting a call to action by the UN-convened Net Zero Asset Owner Alliance (NZAOA).
A new report outlines asset owners’ expectations of external managers for addressing climate risk in private markets, including governance structures, greenhouse gas (GHG) emissions disclosures, and transition-focused investment efforts. The recommendations cover private equity (PE), real estate equity, infrastructure equity, and private debt.
“The first-hand experiences of our asset owner members’ interactions with private market asset managers have shown that it’s much more fragmented than public markets,” Patrick Peura, ESG Engagement Manager at Allianz and NZAOA’s Engagement Track Co-Lead, told ESG Investor.
“They have also signalled that asset managers in the private asset classes are not up to speed [on climate integration] compared to managers across other asset classes, like public equity and fixed income. We want managers across all asset classes to be looking for ways to influence companies in line with their climate commitments and our ambitions to deliver sustainable long-term performance.”
The alliance has reiterated its expectations of all asset managers, asking them to make a public commitment to set net zero targets for Scope 1 and 2 emissions by 2025, offer products that reflect their climate ambitions on a fund level, and create a timebound plan to set sector-level decarbonisation targets by 2025.
For private market asset managers specifically, NZAOA has called on them to support the phase-out of fossil fuels as required by science-based 1.5°C scenarios, and commit to no longer financing infrastructure assets “whose purpose or emissions cannot be aligned with the alliance’s net zero ambitions”. For coal, NZAOA has said managers should follow its position paper on thermal coal, noting that members would be publishing their position on oil and gas in due course.
“Our decarbonisation commitments cover our whole portfolio, so it doesn’t help us if one asset class decarbonises, whereas another asset class has less stringent expectations,” Peura said.
“As investors, we want to ensure that our asset managers represent our long-term interests consistently, regardless of where they’re operating.”
NZAOA members are required to commit to at least halve their portfolio emissions by 2030, cutting emissions by between 49-65% from a 2020 baseline. They must also current portfolio emissions by 22-32% between 2020-25. Previously, these efforts have been focused on listed equity, publicly-traded corporate bonds and real estate assets, but the scope has now been widened across both equity and debt, as well as infrastructure assets in the most carbon-intensive sectors or where they have more than 20% ownership.
“Hopefully this [guidance] provides a signal that those that are driving the fastest and the hardest [to be net zero-aligned] will be rewarded, and those that are lagging behind will find it increasingly difficult to do business with asset owners that have commitments like ours,” noted Peura.
“Asset owners have to be mindful that there’s risk in holding asset classes where our interests and rationales are not reaching company management effectively and real change is not happening on the ground. This could be slowing the work we want to see in accelerating decarbonisation efforts.”
Capitalising on influence
PE firms have huge potential to instil strong and positive climate-focused values in investee companies, according to Allianz’s Peura.
“When they have a board seat or majority control, PE firms can have huge influence over a company’s strategy and trajectory. If they therefore manage those companies in line with our commitments for 1.5°C, then that will result in more resilient companies that will succeed in a 1.5°C world.”
Alongside recommendations published by NZAOA, there is existing guidance to support PE firms looking to align with net zero targets, including the Institutional Investors Group on Climate Change’s (IIGCC) Net Zero Investment Framework (NZIF) and the Science based Targets initiative (SBTi).
Peura said: “Many of our members haven’t had a problem gaining the ear of their asset managers and convincing them that [net zero] is an important topic to reduce risks or improve performance. But there are still hurdles.”
A key issue for many is training and resources, he noted.
“We’ve heard multiple times from asset managers that they’re having a hard time recruiting people that can really speak to both sustainability and financial topics and drive our interests in their organisation’s investment processes.”
The new guidance follows NZAOA’s paper on the importance of taking a three-pronged approach to climate-related engagement, working with companies, policymakers and asset managers to further net zero ambitions.
NZAOA has also issued calls to action on upscaling blended finance and financing CO2 removal technologies.