The challenge facing global society to tackle climate change will require an unprecedented level of investment from the private sector.
Work is already under way to facilitate this work, as demonstrated by the pledges and actions announced during the COP26 conference in Glasgow.
Global finance ministers met on 3 November to discuss how public and private finance can help put climate plans into action and support the drive for net zero carbon emissions.
One of the most significant announcements from the two-week conference came from former Bank of England and Bank of Canada governor Mark Carney, who stated that $130 trillion was now aligned with science-based targets to achieve net-zero carbon emissions over the next approximately 30 years.
The total makes up some 40% of global financial assets and covers those overseen by 450 companies. The Glasgow Financial Alliance for Net Zero, or GFANZ, has helped mobilise financial institutions and investors around the world – including banks, insurers, and pension funds – to align their strategies with the goals of the 2015 Paris Climate Agreement.
Carney and GFANZ co-chair Michael Bloomberg said developing new technology fast enough to combat climate change effectively would require “in the ballpark of $100 billion”, with the bulk coming from the private sector, with many governments still counting the cost of the Covid-19 pandemic.[1]
Impacts on private markets
The increasing pressure on these institutions will have a significant knock-on effect on private markets. With insurers, pension funds, and asset managers now under close scrutiny from regulators and clients alike, the spotlight will fall on the investments they make.
In jurisdictions such as the UK, listed companies will be legally required to report on their carbon footprints and other environmental impacts, while the implementation of the European Union’s Sustainable Finance Disclosure Regulation continues to have a significant impact on investment funds.
An increasingly harmonised global accounting and reporting framework will also lead to higher demands on private companies. The International Financial Reporting Standards (IFRS) Foundation continued its recent efforts to standardise global sustainability reporting standards, establishing the International Sustainability Standards Board (ISSB).[2]
The newly created organisation aims to develop a comprehensive and cohesive global sustainability reporting standard with transparent and robust governance and oversight. This in turn will help investors compare assets on environmental as well as financial grounds, and it is hoped that the ISSB will help improve the consistency, availability, and transparency of data related to environmental issues such as carbon emissions from corporate activities.
These regulations are increasing the pressure on businesses and investors, and COP26 has accelerated this process. However, even the measures just agreed in Glasgow may be insufficient to stave off the worst effects of global warming – more is undoubtedly necessary in the years ahead.
Private markets managers and companies can play a crucial role in mobilising capital towards those companies making a positive change in the world. The vast majority (91%) of private equity firms agree that climate change is an urgent issue, according to an Apex Group study, but just half are currently measuring the carbon footprint of their investment portfolios.[3]
The road ahead
Measuring, controlling, and reducing carbon footprints should be a priority for private markets investors and investee companies alike. Those that can demonstrate a cohesive, considered, and comprehensive journey plan to net zero will likely attract the most capital as investors seek to align their portfolios with these goals.
A recent study by PwC illustrated how investor demand is shifting. More than half (56%) of private equity limited partners surveyed said they had either refused to enter into agreements with general partners or turned down investments for reasons related to environmental, social, or governance (ESG) factors.[4]
Similarly, companies specialising in clean energy technology will likely draw more investment in the years ahead as investors grow more convinced of the positive financial – as well as social and environmental – benefits.
This is already happening in some areas. PwC’s survey found that impact investing – strategies that seek to have measurable positive effects on society and/or the environment as well as making a financial return – are becoming increasingly popular among private equity managers.[5]
Timely and accurate data will be crucial to the success of these and other climate-related investment strategies.
At Apex Group, we have long worked to help our clients in private markets to get a full understanding of their portfolios through financial and non-financial methods. We offer a variety of services for private markets managers to help improve access to information, maintain and improve portfolio transparency and oversight, and keep up with rapidly evolving regulations.
Carbon footprinting is a particularly important aspect of this, as it will be demanded by investors and regulators alike over the next few years.
Our Carbon Footprint Assessment solution gives asset managers a full and comprehensive view of their own performance levels and that of their portfolio companies. More widely, our ESG Ratings and Advisory service helps investors unlock real value and drive transformational change by providing independent, accurate and meaningful data so they can play their part in directing capital that builds a more sustainable future.
Find out more about our ESG services here.
References:
[1] Michael Bloomberg and Mark Carney, ‘To Fight Climate Change, Put Markets to Work’, Bloomberg op-ed, 3 November 2021. https://www.bloomberg.com/opinion/articles/2021-11-03/mike-bloomberg-and-mark-carney-on-climate-finance
[2] ‘IFRS Foundation announces International Sustainability Standards Board, consolidation with CDSB and VRF, and publication of prototype disclosure requirements’, IFRS Foundation press release, 3 November 2021. https://www.ifrs.org/news-and-events/news/2021/11/ifrs-foundation-announces-issb-consolidation-with-cdsb-vrf-publication-of-prototypes/
[3] Source: ‘Apex Group launches Carbon Footprint Assessment & Reporting amid growing market demand’, Apex Group press release, 20 September 2021. https://www.apexgroup.com/insights/apex-group-launches-carbon-footprint-assessment-reporting-amid-growing-market-demand/
[4] Source: PwC Global Private Equity Responsible Investment Survey 2021. https://www.pwc.com/gx/en/services/sustainability/publications/private-equity-and-the-responsible-investment-survey.html
[5] Source: PwC Global Private Equity Responsible Investment Survey 2021. https://www.ifrs.org/news-and-events/news/2021/11/ifrs-foundation-announces-issb-consolidation-with-cdsb-vrf-publication-of-prototypes/
