An $11 trillion investor alliance is going to require members to expand their climate reporting to include assets that aren't publicly traded.
The Net-Zero Asset Owner Alliance, whose members include Allianz SE and the California Public Employees Retirement System, will expand the list of assets subject to emissions targets to include sovereign debt holdings and private equity, it said on Tuesday. It said that members won't be allowed to use carbon credits to meet near-term climate pledges.
The role of private markets in portfolio-decarbonization efforts draws greater scrutiny as a result of the warning issued by NZAOA last year. The United Nations has urged voluntary climate finance alliances to step up their act. The finance industry has countered that lack of data has complicated its efforts on climate.
Claudia Bolli, a member of the NZAOA leadership team who is also the head of responsible investing at Swiss Re, said that the evolving legal and regulatory considerations make it a very challenging environment to navigate through. The balance is what institutional investors want to have, because they want to have a certain credibility. There is a growing need to track and regulate the carbon footprint of private assets. By 2027, managed assets in the global private capital market are expected to climb 20% to $13 trillion from 2021 levels, according to a January forecast by PitchBook. That coincides with concerns that some investors are tackling emissions reductions by selling stakes in high-carbon assets to private investors, where they have so far faced less scrutiny.
There is evidence that assets once held by banks are moving into private hands. Opportunities are emerging as other forms of finance retreat, according to KKR Co Inc, one of the world's largest alternative asset managers.
Many parts of credit in Europe appear attractive, especially since banks have pulled back on lending, according to KKR s Henry H. McVey and colleagues, including Aidan Corcoran, in a note titled Down, But Definitely Not Out.
Due to political sensitivity around the rankings, investors trying to track emissions and gauge risk have been challenged by sovereign debt for a long time. In an August paper published by the Bank for International Settlements, researchers said it was possible to create an investment strategy that rewards countries that reduce emissions.
The goal of limiting global warming to 1.5 C is aligned with a CO 2 reduction of as much as 32% by 2025 and up to 60% by 2030, according to the NZAOA, which was convened by the UN.
NZAOA members that don't comply with the new requirements will be called on to explain deviations, and compliance will be monitored. Bolli said that signs that don't fall into line may face delisting or be expected to demonstrate alignment within a time frame of six months.
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