Implementing net zero goals in private markets

Cleo Fitzsimons, Head of Responsible Investment at the Pension Insurance Corporation, discusses how to properly implement net-zero ideas into a private markets strategy.

Maya Sibulposted on Monday, January 23, 2023

Cleo Fitzsimons, Head of Responsible Investment, Pension Insurance Corporation.

Maya Sibul: What are the key challenges/opportunities in private markets for the net zero goals?

Cleo Fitzsimons: The dynamics within private markets are different in many ways to those of public markets, and the approach needed towards applying ESG considerations such as net zero goals is no different. One of the key challenges faced by private market investors is the lack of readily available and reliable carbon data.

Of course, another key challenge – in particular for some of the sectors that Pension Insurance Corporation (PIC) invests in such as Local Authorities, Affordable Housing, and the Not-For-Profit sector – is a lack of resource.

That being said, there are some great opportunities for private market organisations such as being able to concentrate on ESG and climate-related areas that are most material to them out of the public eye; having an often closer more collaborative relationship with industry peers; and with the right pool of investors supporting them, can leverage stakeholder resources to build out ESG capabilities that can be used towards meeting net zero goals.

Maya: What is the first thing investors should do to implement their net zero strategy within their private market portfolio?

Cleo: The first thing that investors need to do to start implementing their Net Zero strategy within their private markets portfolio is to decide on what approach they will take to measuring their portfolio’s carbon footprint.

"The last two years have seen acceptance within the financial services industry on a carbon reporting standard through Partnership for Carbon Accounting Financials."

Now on to that infinitely topical subject of data: it is a fact that disclosure requirements in private markets are much less onerous than in public markets. This manifests itself through a general lack of transparency in data such as climate data across private market companies. For investors, it is common sense that we can only reduce what we can measure, therefore investors need to adopt an acceptable methodology to measure the carbon footprint of their portfolio companies.

The last two years have seen a significant step forward in terms of acceptance within the financial services industry on a carbon reporting standard through Partnership for Carbon Accounting Financials (PCAF).

PCAF has been excellent for private markets in particular as it allows for a standardised approach to carbon reporting where data is not readily available, and otherwise could not be accounted for. It also allows investors to be transparent about the quality of the data they are receiving, therefore highlighting which companies are reporting actual data versus which data has been estimated.

This increases the data coverage of your portfolio and can help define its carbon positioning more accurately. Interim net zero goals can then be established, including goals around increasing data coverage and quality.

Maya: How would you describe ways to ensure implementation is being achieved in a ‘just’ manner?

Cleo: Implementing net zero needs to be a priority for investors, but it must be balanced against other priorities such as creating a lasting ‘social’ impact. PIC believes that careful consideration needs to be made to ensure that positive ‘E’ impacts are not at the expense of ‘S’ and vice versa and as such supports a ‘Just transition’ and most importantly that PIC is able to fulfil its purpose of paying the pensions of its policyholders.

"We focus on the total ‘net’ social or environmental benefit created while ensuring any negative externalities created are not overly divisive."

The way we do this at PIC is to distinguish on a yearly basis those assets we assess as having a lasting positive impact on stakeholders such as the communities in which the company operates and the environment. We call these assets ‘sustainable’, and they need to demonstrate balance between economic growth, environmental care and social well-being. We focus on the total ‘net’ social or environmental benefit created while ensuring any negative externalities created are not overly divisive. Where balance is compromised, we discuss these on a case-by-case basis through our various layers of ESG governance.

The result of this in terms of our climate strategy means we may sometimes see our portfolio regress from our net zero goals as we may decide to take on assets that are more carbon-intensive or not yet aligned to net zero as we seek cashflows to match our pension liabilities, but their social impact may be significant. This is the case for sectors such as social housing where properties are not very environmentally efficient, but the social benefit is evident. Another similar sector is that of utilities, which is a generally carbon-intensive sector but brings much-needed warmth and electricity to homes – especially in these dark and cold months of winter. In such instances, we make sure to specifically include these assets within our Engagement Strategy to ensure we use our influence as investors to work alongside the company to better their approach towards climate and support where possible their alignment to net zero.

Maya: How do you see net zero strategies progressing throughout 2023 with new legislation, initiatives, and public opinion, for example, and its place in private markets?

Cleo: Legislation is certainly a big push factor for many investors to request and work with their portfolio companies to start measuring and reporting carbon data. There is also increasing legislation within industries other than financial services, which means that it is in a company’s interest to respond to investor requests and take the support offered.

Public opinion has certainly been focused on the climate crisis; however, the energy crisis has eclipsed it somewhat and it may start to fall down further the ranks with the risk of a recession and cost-of-living crisis, and that is understandable.

"Private market companies are well positioned to focus on what is most material to them and can therefore continue to focus on their net zero goals."

It is my, and PIC’s, expectation that there has been a sea change in the industry that has come enough of a shift in mentality, business processes, and build-up of industry capabilities to enable the wider Net Zero agenda to progress and persevere.

As mentioned, private market companies are well positioned to focus on what is most material to them and can therefore continue to focus on their net zero goals as long as they have the right buy-in and support from their investors.

Cleo Fitzsimons is speaking at the Private Markets Investor 2023 event in London in March. Please click here to see more details of the agenda and how to register.

 

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