“We need attributable greenhouse gas data. That’s my big ask to GPs in the room.” So said an executive at an influential US-based investor at PEI Media’s Responsible Investment Forum in New York.
The event was conducted under Chatham House rules, which means comments cannot be attributed to the speakers. The same LP added that if GPs do not provide data for assets’ climate scenario analyses in future, it would rely on sector averages and this may lead to changes in the endowment’s allocations to managers of “dirty” assets.
The LP said: “We need the [overall] carbon emissions, and our percentage of that either to the fund or to the company, depending on what level it’s being reported at. Right now, we don’t have either one of those. So our ask is just for the carbon emissions data.
“Please don’t ask what we’re going to do with it. We’re an LP, we need it. We’re asking you for it. Let us figure out what we’re going to do with it. Hopefully, it’s not surprising that we’re going to use it to do our own carbon footprint. Sometimes people say, ‘What are you going to do with the data?’ We’re asking for it because we need it.”
Of its private equity assets, the LP said: “We have a pretty good sense of what we hold, at least indirectly through our fund managers. But there’s no greenhouse gas data whatsoever. We literally have no data.”
The New York State Common Retirement Fund, another LP represented at the Forum is often faced with qualitative ESG factors from fund managers, said Andrew Siwo, director of sustainable investments and climate solutions at the $278.4 billion fund, who agreed to his comments being reported. “Qualitative factors are difficult to assess quantitatively… or to assign ordinal rankings. Key ESG areas that we examine when assessing a manager include process, information, transparency and engagement in addition to various KPIs across climate and diversity we deem can be material to investment outcomes.
“ESG factors in a credit instrument are a lot different than, say, an equity interest instrument. Even across private equity – venture, buyout and growth approaches face different risk and return profiles that influence environmental, social and governance factors. As a result, we view and assess each asset class uniquely.”
Apollo Global Management’s head of ESG for private credit, Michael Kashani, who also agreed to be quoted, echoed this: “We get so many different requests for data. Credit is tough, but I think we can do it… in credit we need data for everything. We don’t have the luxury of waiting for a standard.
“If you’re a GP, you probably don’t want LPs filling in the gaps in the data on your behalf. Eventually that will lead to changes in our asset allocation decisions.”
An influential LP
“We’re now looking at asset classes that haven’t even been approached” to find standards to apply to private credit, Kashani continued. “So I would say you roll up your sleeves and figure out what works for you. And as long as at least a few entities start doing that, it starts to become a standard.
“Case studies alone do not work anymore. It’s about consistent evidence on the investment side and then on a portfolio basis.”
The LP calling for greenhouse gas data from GPs also said it expects LPs will soon start asking GPs about their scenario analyses – which predict and evaluate how investments are impacted by different scenarios in which climate risks materialise. “I’m addressing these comments to the GPs: if you’re in the market in 2022, raising a new fund, my guess is you’re not going to get too many questions about your scenario analysis. But projecting ahead a little bit to 2023, 2024, I think that’s going to become pretty standard.”
Investors can formulate sets of climate risk scenarios along different frameworks, including potential global temperature changes and sector- or industry-specific scenarios. “We haven’t figured out which method we’re going to use – temperature alignment or one of those sectorial-based methodologies. But that’s coming,” said the LP.
“And if you’re a GP, think this through a little bit. You probably don’t want the LPs filling in the gaps in the data on your behalf. We’re just going to use sector averages, [and] you’re investing in the six dirty sectors, that’s not going to look good for your fund. Eventually that will lead to changes in our asset allocation decisions. It hasn’t yet, but I’m pulling up my crystal ball. I think that’s coming.”
This scenario analysis data is about “materiality”, the LP said; it allows the investor to calculate the risk of impact to an asset’s financial performance and value.
NYSCRF also views ESG risks through a materiality lens, said Siwo: “Several years ago, we took the position that ESG is a tool that can be used to identify risks and opportunities. Every investment faces environmental, social and governance risks and opportunities. Table stakes are increasing.”