Andy Pitts-Tucker, Managing Director of ESG Ratings & Advisory, Apex Group, at COP26
Across the two weeks of events and talks in Glasgow, some of which I was privileged to take part in, significant steps forward were made in the global effort to reduce the impact of climate change – although only time will tell if it is enough.
In the financial services sector, former Bank of England and Bank of Canada governor Mark Carney announced that, through the Glasgow Financial Alliance for Net Zero (GFANZ), more than $130 trillion of private finance is now committed to science-based targets for achieving net-zero carbon emissions.
The UK, as the host of COP26, has also set out ambitious plans to transform the financial services sector into a leading force in combatting climate change. Chancellor Rishi Sunak announced legal requirements to be placed on listed companies and financial institutions to adopt and publish net-zero plans.
And, the US Treasury Secretary, Janet Yellen, announced that the US would join the UK in supporting the Climate Investment Funds Capital Markets Mechanism, aimed at mobilising private funds and provide half a billion dollars every year to a clean technology fund, including the new Accelerating Coal Transition investment initiative.
These follow earlier commitments by the European Union when it set out its plans through the Sustainable Finance Disclosure Regulation in March 2021, which will continue to have a profound impact on investors and asset managers alike.
Private markets and COP26
Ensuring that COP26’s goals are met will require far more than big statements from world leaders. As Mark Carney stated at the conference: “The money is there for the transition, and it’s not blah, blah, blah.”
To make sure his words ring true, investors of all kinds will need to get behind the calls for private capital to be invested into renewable energy and new technologies to decarbonise sectors such as transport, manufacturing, and heavy industry. Private markets managers will play a key role in this, with their ability to take a direct and substantial role in how their portfolio companies are managed.
Investors are becoming increasingly demanding of their asset managers when it comes to sustainability and climate change. This makes it more important than ever that private markets managers can respond, demonstrating actions and impact to help investors meet their sustainability objectives and, ultimately, reduce the effects of climate change.
One of the major barriers to effective large-scale climate-positive investing has been a lack of coherent or consistent data from corporates. In an effort to improve this, the International Financial Reporting Standards Foundation has set up the International Sustainability Standards Board, bringing together two existing green accounting standard setters.
For managers of private markets assets, this development makes it all the more important that they engage proactively with companies on data issues. Failure to provide sufficient information on decarbonisation strategies and other environmental and social metrics could result in difficulties in raising funds and dissatisfied clients.
That said, there is plenty of evidence that private equity is stepping up to the plate. Private equity and venture capital managers alike are raising significant amounts for climate and sustainability-themed funds. Venture capital in particular has been popular among sustainability-conscious investors: More than 40% of all impact funds raised in the past five years have been impact funds, according to PitchBook.
In addition, PwC research indicates that global investment into start-ups in the climate technology sector has grown significantly faster than other areas of the venture capital market in the past few years.
Carbon footprints
One of the key outcomes of the COP26 conference was a global market for carbon emissions offsetting, which will allow the international trading of carbon credits. However, the need remains for a drastic reduction in overall emissions to meet the goal of keeping global warming to below 1.5 degrees Celsius above pre-industrial levels.
As the private markets sector embraces environmental, social, and governance (ESG) themed investing, it is more important than ever for investors to have a full picture about what these managers and their products can offer.
Apex Group’s ESG offering for private markets managers includes a carbon footprint assessment service. This identifies, quantifies and tracks three categories of emissions, as defined by the GHG Protocol, that contribute towards a company’s carbon footprint, helping to measure, control, and reduce emissions.
Scope 1 covers direct emissions from fuel sources directly owned or controlled by the company, while scope 2 includes indirect emissions, such as those from energy purchased to power office lighting or air conditioning. Scope 3 emissions are those from other company-related activities such as from business travel or purchased goods.
The assessment combines this data into an emissions breakdown, rating of intensities, and applies information about relevant carbon metrics for reporting in line with the European Union’s Sustainable Finance Disclosure Regulation.
We use up-to-date information from the International Energy Agency (IEA) on emission factors, and we follow industry best practice standards such as the recommendations of the Task Force on Climate-related Financial Disclosures, in order to understand and quantify a company’s carbon footprint and potential commercial risks.
The road ahead
The full impact of COP26 is still being debated, with some commentators less satisfied than others about the achievements and plans set out during the conference.
What is clear from a financial services perspective, however, is that investors and regulators are moving down a path of decarbonisation and proactive environmental and socially aware investing. Private markets managers and portfolio companies are adapting – and will need to continue to do so to thrive in and contribute to a low-carbon, greener future.
As Patricia Espinosa, Executive Secretary of the UN Framework Convention on Climate Change, explained, the radical change necessary to succeed in addressing climate change requires substantial input from the private sector. “The private sector is realising that climate risks are very important for their portfolios and they need them align them to a more sustainable way of doing things.”