IIGCC factors stakeholder influence into new PE guidance

The group went 'back to the drawing board' after a public consultation revealed a 'mixed response' to the initial guidance, says senior investment specialist Misa Andriamihaja.

The Institutional Investors Group on Climate Change has incorporated stakeholder influence into its updated private equity-focused guidance on decarbonising portfolio companies, released today.

The Paris Aligned Investment Initiative, a forum founded by IIGCC, released the Net Zero Investment Framework in March 2021. The original NZIF covered listed equity, fixed income, real estate and sovereign bonds. Over time, more asset classes have been added, including infrastructure.

Initial guidance for the private equity market was released last year and included  information on the metrics, targets, scope of portfolio companies to be included in net-zero strategies and recommended actions for GPs and LPs.

A public consultation was opened alongside the PE guidance. The consultation revealed a “mixed” response to the initial PE guidance, IIGCC senior investment specialist Misa Andriamihaja told NPM, primarily due to its “one size fits all approach”. In response, the group went “back to the drawing board” to create guidance that took account of stakeholders’ position in the PE ecosystem.

As a result, a new “influence band” for LPs and GPs has been introduced. The bands separate GPs and LPs and then subdivide them by how much influence they have over portfolio companies. GPs with greater than 50 percent board votes are deemed to have the most influence over portfolios; LPs that make investments through the secondaries market are considered to have the least influence. An organisation should take its level of influence into consideration when formulating net-zero portfolio targets, according to the guidance.

The guidance is free to access for all, not just IIGCC’s 400-plus members. “Our hope is that the guidance will serve a purpose in encouraging these GPs [which are yet to engage with net zero],” Andriamihaja said. “It’s not in our place, I believe, to say the GPs must do this, but they could take elements of it to the extent that they wish… They are free to choose which way they would like to proceed.”

There have been other attempts to produce guidance for private equity actors looking to decarbonise their portfolios in recent years. Initiative Climat International, a decarbonisation group for private equity investors and managers hosted by the UN-backed Principles for Responsible Investment, produced its guidance on the topic last year.

“We have a standardised approach to target-setting, engagement and reporting between the three layers – the LP, the GPs and the portfolio companies,” said Andriamihaja. “We are the first guidance of its kind that takes into consideration this whole ecosystem.”