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Newsletter: The race to net zero with BlackRock, Brookfield and BT Pension Scheme

Hot on the heels of BlackRock's announcement of a decarbonisation tie-up with Temasek this morning, we are all about the climate today. Well nearly: we also bring news of the US SEC, which has reported findings from its ESG-focused sweep. The result? Mixed.

The net zero race: momentum gathers

At £57 billion ($79 billion; €66 billion), the BT Pension Scheme is the second largest in the UK. It has circa £6.8 billion allocated to private equity, infrastructure and real estate.

It is confident, its CEO Morten Nilsson tells us, that its members want it think about more than just returns. Over two-thirds of its pensioners said they expect the scheme to use its investments to “make a positive impact on the environment and society,” he reports.

Nilsson was writing by invitation for New Private Markets, as part of our Build Back Better series. We asked influential private markets investors and managers to explain what their peers in private markets should do in order to ensure the industry contributes to a more sustainable post-covid world, and in doing so bolsters its “license to operate”.

Nilsson – along with five other contributors among our 16 – chose to focus on climate.

“Of the long-term risks monitored by the BTPS Trustee, it was increasingly clear that climate change posed the biggest threat to the scheme meeting its long-term commitments, both due to physical risks and from risks arising from the global transition to a low-carbon economy,” he writes.

At the start of 2020, the pension amended its “core investment principle” from finance first to “sustainable long-term value creation”.

“One of the primary drivers of this change was the acceptance that climate change is a present risk to the scheme, not a future risk,” writes Nilsson. The pension scheme has set an earlier-than-most target for its portfolio to be net zero by 2035, something that Nilsson believes will result in “the same or better” investment returns over the long run.

So where does Nilsson see room for private markets improvement? Better data.

“While we have relatively good data on our public equities and corporate bonds, coverage of scope 3 emissions in some sectors and data for other asset classes is more limited. Private equity is one of these asset classes.”

By now those in private markets are getting used to this issue. BlackRock Alternative Investors’ head of sustainable investment Teresa O’Flynn, writes that the firm is “taking steps to produce consistent and thorough private market data and to encourage the industry to do the same”.

Brookfield’s Connor Teskey – who alongside Mark Carney runs the firm’s potentially huge climate transition fund line – writes of the importance of consistency in the measurement and disclosure of emissions, as investors try to take advantage of the outsized opportunity that decarbonisation presents.

To this end, nearly 90 private equity firms have now signed up to the Initiative Climat International, which aims to develop guidance for PE firms on net zero ahead of COP26 in November this year and – significantly – to address “key data and disclosure challenges in private markets by developing common metrics and methodologies for measuring and reporting emissions (including Scope 3)”.

Net zero vs not zero

On the subject of climate data disagreement, Mark Carney’s comment in March that Brookfield had achieved net zero by virtue of “avoided emissions” was picked up and run with over the weekend in the Financial Times (subscription required).

  • The FT’s take: “The backlash illustrates the complexity of climate accounting, which lacks standardisation and is open to manipulation, and the ease with which even experienced climate ambassadors can fall foul of the still-emerging rules.”
  • Brookfield’s comment: “[We are] fully committed to the goal of achieving net zero greenhouse gas emissions by 2050. We will build on our deep capability in renewable power and go much further to take a leadership role in contributing to this transition, including through science-based emissions reduction strategies.”

BlackRock doubles down

On the subject of outsized opportunities: BlackRock has just inked a deal with giant Singaporean investment fund Temasek to launch Decarbonization Partners: a series of late-stage venture capital and early growth private equity funds to invest in “decarbonisation solutions”.

In a joint statement the organisations said the venture has a fundraising target of $1 billion for its first fund, including capital from Temasek and BlackRock. The two backers have committed $600 million between them.

Said BlackRock chairman and CEO Larry Fink: “For decarbonisation solutions and technologies to transform our economy, they need to be scaled. To do that, they need patient, well-managed capital to support their vital goals. This partnership will help define climate solutions as a standalone asset class that is both essential to our collective mission and a historic investment opportunity created by the net zero transition.”

Meanwhile, BlackRock Real Assets has closed its third global renewables fund on $4.8 billion, almost doubling its $2.5 billion target. David Giordano, head of renewable power, told affiliate title Infrastructure Investor’s Zak Bentley a story of gathering momentum: “We got some late entries from public pension plans where sustainability was not as big a priority for them but through the pandemic that became a much bigger focus. We’re seeing a big enlightenment happening across the APAC region.”

UK-based institutions came into the fund “much more strongly in a way we haven’t seen before”, added Jim Barry, global head of BlackRock Real Assets.

“There’s been a very substantial change in the last two years and GRP III has played into that structural shift, which in my mind will dominate the next decade,” explained Barry. “You can make money and earn a yield on fossil fuels and gas pipelines in the immediate to medium term, but if you’re thinking long-term investing, renewables is the opportunity.”

Alert!

The US Securities and Exchange Commission just issued its first ESG-focused risk alert. Following examinations of various investment advisor types (including private funds), the agency found – perhaps unsurprisingly – that there is too much variation in how firms are approaching “ESG investing” and often a disconnect between how firms’ stated aims translate into actual investment policy.

Diversity call

Members of Congress have sent a letter to investment managers, including Blackstone and BlackRock, requesting info and data on their diversity and inclusion efforts. Representatives Maxine Waters of California and Joyce Beatty of Ohio included the two big private equity players among a list of 31 investment managers who received the letter.