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BlackRock: ‘Any net zero conversation must start with measurement’

Private markets investors need to strive for ‘consistent and thorough private market data’, writes Teresa O’Flynn, global head of sustainable investing at BlackRock Alternative Investors.

Covid-19 has forced society to confront the existential threat of climate change in a way we have never seen before. Companies, governments and investors have centred on the principle of “net zero” – that is, building an economy that emits no more carbon than it removes from the atmosphere by 2050, the scientifically established threshold necessary to keep global warming well below 2C.

Net zero is a complex topic and demands a transformation of the entire economy – which today is highly dependent on fossil fuels – as well as significant policy and technological innovation over the coming decades. The momentum towards a net zero economy also has profound implications for company valuations and capital allocation. This is particularly true for private markets, given their long-term investment horizons and illiquid nature. We believe that our clients will be better served by being on the forefront of this transition.

As Larry Fink wrote in his annual letter to CEOs, it is not only public companies who must embrace transparency around climate risk, but private companies as well.

Any net zero conversation starts with measurement. For private markets investors, this can be particularly complex.

“Industry collaboration and policymaker engagement are crucial to tackling these challenges and to ensuring that alternative portfolios are aligned with the goal of net zero”

In order to set reduction targets and implement business plans that are aligned with net zero, it is critical to first assess the carbon exposure of a given investment portfolio, company or project. Unlike in fixed income and equity portfolios, climate data such as scope emissions and temperature alignment are not widely available in private markets. This information must be gathered directly – project by project, company by company – which requires both time and resources.

This exercise needs to be informed by materiality – starting with the worst offenders. Whether one is a debt or an equity investor, control or minority shareholder will influence the approach. Regardless, the question comes down to this: Are you in the driver’s seat, or is the conversation one of engagement?

Industry collaboration and policymaker engagement are crucial to tackling these challenges and to ensuring that alternative portfolios are aligned with the goal of net zero. As we look across private markets, we see the twin dynamics of a growing opportunity set as more capital comes into the space, coupled with competitive pricing and valuations. It is critical that investors maintain discipline and keep sustainability considerations centre stage.

BlackRock is committed to supporting the goal of net-zero greenhouse gas emissions by 2050 or sooner and to help our clients navigate that transition.

We are taking steps to produce consistent and thorough private market data and to encourage the industry to do the same. This includes partnering with data providers, developing new software and analytical capabilities, and carrying out bespoke carbon footprinting analysis so that we can help our clients track current and potential future net-zero alignment.

Furthermore, the transition to net zero presents a historic investment opportunity across a variety of sectors, including power, transportation, industry and infrastructure. BlackRock was an early mover in renewable power investing and now has more than $11 billion invested in over 270 wind and solar projects globally, including more than $8 billion in our global renewable power platform to date. Beyond renewable power, we are identifying opportunities created by the massive path of decarbonisation that the world is on and launching new sustainability-oriented products for clients who want to align their investments with the net zero goal.

We also believe that engagement across peers, clients, investors and policymakers will increase in importance to ensure the industry progresses together. We are members of industry organisations such as the Institutional Investor Group on Climate Change, GRESB, Principles for Responsible Investment, and the Alternative Investment Management Association Committees that convene players across the industry committed to moving the needle in a meaningful way and accelerating the global energy transition.

The net zero opportunity is here. Although we may not have all the answers today, a focus on measurement, implementation and engagement are necessary first steps to tackle private markets challenges in addressing climate risks and ultimately building back better.

Teresa O’Flynn is global head of sustainable investing at BlackRock Alternative Investors