43 signatories of the Net Zero Asset Managers Initiative (NZAMI) have committed $4.2tr AUM to net zero.
NZAMI, representing 236 asset managers with $57.5 trillion in assets under management (AUM), issued its first progress report in November 2021. 30 ‘first wave’ signatories were required to disclose how much of their AUM they would begin to align with a pathway of net zero by 2050. The majority (53%) based their target setting on the IIGCC’s Paris Aligned Investment Initiative (PAII) Net Zero Investment Framework – NZIF 1.0.
At the time, the Net Zero Investment Framework (NZIF) 1.0 covered listed equities and debt, sovereign bonds and real estate, not private debt or equity. The PAII has now released an annex to NZIF 1.0 covering private equity which is publicly accessible and open for consultation until 27 February 2022. Given the influence and engagement that goes hand in hand with this asset class, NZAMI signatories with relevant exposure may as a result be encouraged to boost ambition toward meaningful real-world change.
Coupled with NZIF’s guidance to develop more Paris aligned products and the limited scope for climate solutions in traditional asset classes, we will likely see more interest in private market investment opportunities going forward. Clear guidance on what and how to align to a net zero pathway by 2050 is therefore vital to support private equity participants and their underlying portfolio companies to set realistic and actionable decarbonisation pathways.
In the annex, private equity is broken down into subcategories for General Partners (GPs) and Limited Partners. Portfolio investments are classified as Buyout and Growth, Secondaries and Fund of Funds. GPs for example are expected to:
- Include all companies in which they hold 25%+ equity, have a board seat and are in a high impact sector (defined by TPI) in their initial targets.
- By 2030 increase coverage to 90% of a portfolio either in terms of emissions or AUM.
- Include venture capital investments (start-ups) which have 50+ employees and EUR10mn+ turnover in which GPs have stakes of 15%+ and a board seat.
The Private Equity guidance in its current form bakes in net zero and climate risk assessment into the entire value creation journey for institutional investors deploying equity capital into unlisted opportunities: from pre-investment to exit; from pitch books to investment committee papers; from limited partnership agreements to side letters. If climate KPIs enter manager incentives and investment T&Cs, reporting against them will face increasing scrutiny.
As asset managers consider adding unlisted equity investments into their targets, how will they build confidence in the KPIs they report given the lack of information? Already asset owners and other capital providers are challenging in-house assumptions and proprietary methodologies. Best-in-class open source methodologies and independent expertise to set challenging KPIs should take precedence. Private equity has the potential to make a meaningful climate impact. The question is how quickly and how much.
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