GPs seeking commitments from Net Zero Asset Owner Alliance members after 2026 will need to align their funds with net-zero pathways – including implementing “strict net-zero requirements” in the underlying assets.
The Alliance, which counts 84 members managing assets totalling $11 trillion, has introduced new reporting and target-setting requirements for private equity, infrastructure and real estate equity investments. The new requirements were introduced last week in the third edition of the Alliance’s target-setting protocol.
Targets must be formulated using science-based decarbonisation pathways aligned with a 1.5°C temperature rise cap by 2050. Members should “strive for” carbon reduction targets in the range of “-22 percent to -32 percent by 2025, and -40 percent to -60 percent by 2030”, the protocol states.
Reporting: Members must report the annual Scope 1 and 2 carbon emissions for their direct private equity portfolios from 2024, and for their private equity, infrastructure and real estate equity fund investments from 2025. Scope 3 should be included “where possible”, the protocol states.
Direct private assets: Members of the Alliance should start engaging with directly-held assets to set net-zero and near-term decarbonisation targets this year. By 2025, members should have set 2030 and near-term decarbonisation targets across their direct private equity portfolios. The third edition of the protocol includes a methodology to meet the direct private equity target-setting requirements.
Private funds: From 2026, Alliance members must ensure that all private equity, infrastructure and real estate funds they make new commitments to are net-zero-aligned. “Members shall use their influence during the due diligence phase to call for 1.5°C-aligned reduction targets. All new fund manager appointments should include a commitment to net zero and alignment with a 1.5°C decarbonisation trajectory,” the protocol states.
Members should also engage with the managers of their existing private fund investments to implement decarbonisation targets in the underlying assets.
A future edition of the protocol will include a target-setting methodology for these fund investments.
Private debt fund investments will also be covered in a future edition of the protocol.
Meeting these targets
Members should rely on engagement rather than divestment or offsets. “Each single investee company should decarbonise fast enough – that’s what needs to happen in the real economy, and that’s how we look at the target setting,” says Udo Riese, ESG lead at Allianz Investment Management. Riese helped formulate the protocol.
How can asset owners, which typically have minority stakes in funds and companies, induce investee companies to implement such measures? “Like how it’s done in the listed side,” Riese tells New Private Markets. “What is necessary is that we create a critical mass of investors who push investee companies as far as economically possible… a critical mass of like-minded investors to move the market.” Sometimes, this comes down to voting at shareholder and board meetings, Riese adds.
“The private equity space is also aware of the net-zero transition,” says Claudia Bolli, head of responsible investing at Swiss Re, who also worked on the protocol. Bolli suggests investors put their decarbonisation expectations as conditions for commitments or clauses in investment documents.
Bolli acknowledged that these target-setting and engagement requirements can be challenging, especially for small Alliance members, as asset owners are often already short of due diligence and deployment resources. For that reason, companies with transition plans already in place would be “more interesting for me”, said Bolli. Having transition plans in place will soon become a “standard requirement” rather than “a nice to have” for companies or GPs seeking to raise capital, and “GPs will be ultimately required to [include transition plans in business models] to stay attractive for the ones who have the money”.
NZAOA, convened by the UN, was established in 2019 and brought under Mark Carney’s GFANZ coalition ahead of COP26 in 2021. Its members have set portfolio-wide 2050 net-zero targets. The target-setting protocol is updated periodically to cover new investment classes and types.