Over the two weeks of events and discussions in Glasgow, which I had the privilege to participate in, significant strides were made in the global effort to reduce the impact of climate change – albeit only time will say if this will suffice.
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 130,000 billions of dollars in private funding are now committed to scientific goals to achieve net-zero carbon emissions.
The UK, as host of COP26, has also set ambitious plans to transform the financial services sector into a leading force in the fight against climate change. Chancellor Rishi Sunak announced that legal obligations would be placed on listed companies and financial institutions to adopt and publish net-zero plans.
And, US Treasury Secretary Janet Yellen announced that the US will join the UK in supporting the Climate Investment Funds Capital Markets Mechanism, aimed at raising private funds and providing half a billion dollars each. year to a cleantech fund, including the new Coal Transition Acceleration Investment Initiative.
These follow on from earlier commitments by the European Union when it presented its plans through the Sustainable Finance Disclosure Regulation in March 2021, which will continue to have a profound impact on investors and businesses. asset managers.
Private markets and COP26
Ensuring that the goals of COP26 are met will require much more than grand declarations from world leaders. As Mark Carney said 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 support calls for private capital investment in renewables and new technologies to decarbonise sectors such as transportation, manufacturing and heavy industry. . Private market managers will play a key role in this regard, with their ability to play a direct and substantial role in the way their portfolio companies are managed.
Investors are increasingly demanding of their asset managers when it comes to sustainability and climate change. It is therefore more important than ever that private market managers can respond, demonstrating actions and impact to help investors achieve their sustainability goals and ultimately reduce the effects of climate change.
One of the main obstacles to effective large-scale climate-friendly investment has been the lack of consistent or consistent business data. In an effort to improve this, the International Financial Reporting Standards Foundation has established the International Sustainability Standards Board, bringing together two existing green accounting standards bodies.
For private market asset managers, this development makes it all the more important that they proactively engage with companies on data issues. Failure to provide sufficient information on decarbonization strategies and other environmental and social measures could lead to difficulties in raising funds and dissatisfied customers.
That said, there is plenty of evidence that private equity is on the rise. Private equity and venture capital managers raise significant amounts for thematic funds on climate and sustainability. 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.
Additionally, PwC research indicates that global investment in climate technology startups has grown much faster than other areas of the venture capital market in recent years.
One of the main outcomes of the COP26 conference was a global market for carbon offsets, which will enable international trade in carbon credits. However, a drastic reduction in global emissions remains necessary to achieve the goal of keeping global warming below 1.5 degrees Celsius above pre-industrial levels.
As the private markets sector embraces environment, social and governance (ESG) themed investments, it is more important than ever for investors to have a complete picture of what these managers and their products can offer.
Apex Group’s ESG offer for private market managers includes a carbon footprint assessment service. This identifies, quantifies and tracks three categories of emissions, as defined by the GHG Protocol, that contribute to 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 business-related activities, such as business travel or the purchase of goods.
The assessment combines this data into an emissions breakdown, an intensities assessment and applies information on carbon measurements relevant for reporting in accordance 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 Related Financial Disclosures climate, in order to understand and quantify the carbon footprint and potential business risks.
The road ahead
The full impact of COP26 is still the subject of debate, with some commentators less satisfied than others with the achievements and plans defined at the conference.
What is clear from a financial services perspective, however, is that investors and regulators are embarking on the path of decarbonization and proactive environmental and socially conscious investing. Private market managers and portfolio companies are adapting – and will need to continue to do so to thrive and contribute to a greener, low-carbon future.
As Patricia Espinosa, Executive Secretary of the United Nations Framework Convention on Climate Change, explained, the radical change needed to successfully tackle climate change requires a substantial contribution from the private sector. “The private sector realizes that climate risks are very important to their portfolios and they need them to align them with a more sustainable way of doing things.”