Pathzero recently attended the 20th Anniversary AVCJ Private Equity & Venture Forum for Australia and New Zealand, where asset owners and asset managers met to exchange ideas and discuss the latest industry developments affecting investors in private capital.
Pathzero Co-Founder and CEO Carl Prins participated in a panel discussion, ‘Climate change and decarbonisation: seizing the opportunity’ alongside Edwina Matthew (Wellington Management), Natasha Morris (Adamantem Capital) and Suzanne Tavill (StepStone). The panel was moderated by Julie Vasadi, Director for ESG Due Diligence Transaction Services at KPMG.
Julie set the scene by outlining that climate change is now considered to be one of the greatest threats to our economic stability, but that it also represents the largest investment opportunity of the century.
Extreme weather events resulting from climate change are expected to cost between AUD2-4 billion per year by 2030. In response to this urgency, a record number of countries and companies have pledged commitment to carbon neutrality or net zero by 2050.
The amount of capital required to align our economy with the objectives of the Paris Agreement presents large investment opportunities, with USD5.7 trillion of annual investment required until 2030 into energy transition and decarbonisation initiatives (World Energy Transitions Outlook 2022).
The panel followed on to present a wide-ranging discussion, covering topics from the investment opportunities relating to decarbonisation, to climate-related risks and opportunities.
Here are our top learnings from the panel discussion.
1. ‘Bottom up’ ESG integration at a portfolio company level is equally as important as the impact they have on the world.
Edwina explained there are lots of investment opportunities from a ‘top down’ ‘thematic’ perspective but highlighted that we must also take a ‘bottom-up’ approach which examines the ESG integration of the companies we are investing in.
She elaborated that just because a company ‘screams green’, it does not necessarily mean it will be sustainable from an operational perspective, and it is important that ESG risks are managed.
In essence, climate impact and ESG integration are mutually exclusive, and investors should be careful not to assume that one substitutes the other – we need both.
2. Asset managers need to start thinking about ESG integration ahead of regulation.
Edwina discussed that while private markets are not facing the same data and disclosure requirements that we are seeing in public markets, pressure is coming through indirect channels such as supply chains and LP expectations.
Asset managers are being subjected to climate disclosure requirements at a portfolio level, and that in turn trickles down to asset managers in terms of having to obtain carbon data and disclosures from their portfolio companies.
Suzanne elaborated that portfolio companies will need large amounts of data at their disposal to meet disclosure requirements, whether they intend to go public or not. Private companies will need data to meet the needs of their LPs, who in turn, need to disclose their net zero plans.
She also pointed out that anyone trying to sell a fund into other jurisdictions, such as Europe or the UK, may be captured by already in-place international regulations.
3. Decarbonising private market portfolios presents both challenge and opportunity.
Carl explained that obtaining accurate carbon data across private markets portfolios has traditionally been a key challenge for investors.
In public markets, public companies release disclosures and their annual accounts. As an asset manager, the challenge in obtaining data is about collating it into a structured form so that it can be analysed and used. This is relatively straight forward, however, the level of influence over those assets is quite low.
In private markets, there is an additional challenge in that the portfolio companies or assets do not often have well-formed TCFD-aligned risk management of their climate exposures, let alone carbon emissions calculations.
Carl moved on to explain that on the upside, asset managers typically have a lot more influence over those businesses, especially in private equity, therefore representing a significant opportunity. We are already beginning to see the impact that asset managers can have on decarbonisation when they have access to this data.
Julie Vasadi (KPMG) opens the panel discussion on 'Climate change and decarbonisation: seizing the opportunity'.
4. Asset managers are making progress relating to decarbonising portfolios, and collaboration between market participants will be crucial.
Suzanne described that we are in the early innings of asset managers developing their competencies and capacity in relation to reducing their portfolio emissions.
Asset managers are beginning to understand that they must engage their portfolio companies to measure their carbon footprint. Suzanne explained that this step is critical because it is not possible to set a decarbonisation strategy without an understanding of the baseline, or where the key sources of emissions are coming from.
However, asset managers are struggling to find ways to collect the data without it becoming time-onerous and distracting to their portfolio companies.
A real-life example of how this has played out is through Adamantem’s experience. Adamantem have been carbon foot-printing their portfolio companies since 2019.
Natasha explained that her team found the range of knowledge about carbon – and accessibility to carbon data – between companies to be significant. Some companies did not know what greenhouse gas emissions were, while others had strong environmental management platforms with access to good data.
Software – such as Pathzero – will be critical in facilitating the collaboration between asset managers, asset owners and portfolio companies.
Julie Vasadi (KPMG), Edwina Matthew (Wellington Management), Natasha Morris (Adamantem Capital), Carl Prins (Pathzero), and Suzanne Tavill (Stepstone).
5. Accessing carbon data in private markets is a challenge, but significant progress has been made.
Carl explained that there has been a convergence of global frameworks and standards making the measurement and management of portfolio emissions more accessible.
For example, the Partnership for Carbon Accounting Financials (PCAF) has set a methodology that can be consistently used across financial institutions across several asset classes internationally. There is currently more than $80 trillion AUM reporting under this framework.
This enables the ability to estimate the emissions of an asset, or portfolio, and gives an associated data quality score. This means that when looking across a portfolio, disclosures can be compared across asset classes such as private equity, private debt, and commercial real estate.
6. Quality data – and how it is used – should be a key focus for investors.
Natasha pointed out that it is important for asset managers to get started on their climate journey, and not to wait for the perfect data set.
Rather, asset managers should focus on improving the quality of data over time so it can be more effectively used to drive decarbonisation strategies, and ultimately, to drive better business decisions and create value.
Natasha elaborated to say that this is not just about saving the planet, it is about creating resilience across the businesses we invest in and creating value through decarbonisation strategies.
Adamantem looks at climate from both a physical and transition risk perspective during the due diligence stage. They have been doing this since 2020, not from a disclosure point of view, but in recognition that climate is a real investment risk, and that asset managers are not doing their job if they are not considering it in their investment decision making processes.
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