This article is a response to a Friday Letter published by New Private Markets, which argued that interim net-zero targets were pushing investor capital away from heavy emitting industries, where it is needed most for the global energy transition.
Net zero is an end goal that has enormous collective global support, but we need to recognise there are multiple different pathways to reach this desired state; with many trade-offs or benefits within different decarbonisation routes.
At Schroders Capital, we think about this in several ways:
- The variation of measurement methods tailored to each asset according to the level of data available;
- Scientific-based emission commitments;
- Employing a themes-based approach.
Something that is crucial to determining the true benefits and costs of each route to decarbonisation is the ability to measure and manage carbon outputs – and the availability of that data is one of the biggest challenges we face in private markets. Given the diverse offering of Schroders Capital, we have varied investor-investee relationships, where we have differing levels of ability to access emissions data.
We have a different level of visibility in real estate equity for example, where we directly own the final asset, than we do for the participation in a securitised commercial real estate loan. This variation in the availability of data has encouraged us to develop our own methods of carbon measurement, and consider the topic of net zero from new angles.
Our financed emissions framework is where we begin our process, attempting to understand the emissions profile of our investments today. We do this through the reported data that comes from our investments where possible, and through a series of proprietary proxy estimates to understand our contribution to climate change and expand our coverage of carbon measurement across sectors and asset classes. We continue to look to initiatives such as the PCAF (Partnership for Carbon Accounting Financials) for guidance on attribution and data quality within specific financing types.
Emission reduction commitments are likely to form an element of a manager’s transition strategy. We are in the process of shaping this strategy at Schroders Capital, having committed to have a science-based target (with SBTi) on all investments by 2040. At present, we provide feedback to industry frameworks on the development of the methodologies that we feel need to evolve for us to assess the transition of specific asset classes like private equity and infrastructure.
Methodologies also need to mature with regards to developing markets where the same assessment cannot be assumed. Guidance through the Net Zero Investment Framework (NZIF) of the IIGCC (Institutional Investors Group on Climate Change) is a step in the right direction, enabling the comparison with regional sector pathways to test and categorise the level of current alignment to net zero.
Our evolving themes-based approach also allows us to assess net-zero contribution across a variety of climate themes, and explore the requirements for the transition to net zero not simply with an emissions number.
Our net-zero components include decarbonisation technologies, climate adaptation initiatives and social interdependencies; all needed within a successful net-zero transition.
Our themes lens enables us to use a wider set of KPIs, tailored for specific asset classes, to explore specific requirements for net zero such as expanding renewable power generation or within climate adaptation, the number of people experiencing reduced climate vulnerability.
We continue to expand our approach to net zero, exploring the feasibility within asset classes and the opportunities for financing climate solutions and developing strategies to transition assets to meet their full decarbonisation potential. We remain committed to contribute and monitor industry frameworks to ensure our approach aligns to the expectations and standards our clients expect us to follow, while considering the implementation of our investees.
Holly Turner is a climate specialist at Schroders Capital, a private markets investor with more than $91 billion in assets under management