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‘Quite difficult’ future for GPs who ignore net zero, says StepStone

Only 2% of 533 funds examined in a StepStone Group report aim to have net-zero emissions.

Just 12 percent of GPs measure the carbon footprint of their own operations, known as Scope 1 and 2 emissions, according to a study by private markets firm StepStone Group, and fewer than 5 percent of funds are being invested based on emissions reduction targets. Stepstone surveyed 340 managers and examined 533 funds.

Scope 3 emissions, which count all indirect emissions from an across an organisation’s value chain, are the hardest to calculate as the data is normally in the hands of separate organisations and, given that one company’s Scopes 1 and 2 are another company’s Scope 3, there is a risk of double counting. Says the report: “Understanding Scope 3 is important for LPs and GPs: this is where emissions from portfolio companies are designated. For LPs, including portfolio holdings in their footprint is increasingly well accepted. GPs, on the other hand, have been slower to act. But they are coming along, particularly as guidance becomes clearer on requiring these calculations.”

The report highlights the “deceptively challenging” effort facing GPs: growing investor pressure to account for their greenhouse gas emissions by implementing comprehensive portfolio measurements. The report spells out what LPs increasingly expect their GPs to report in terms of emissions data and explains the difficulty GPs have in accurately measuring Scope 1, 2 and 3 emissions.

“While there are some standards in place to help firms work through the intricacies, going net zero can be a particularly arduous path for private markets,” the report stated, citing survey results showing only 2 percent of the funds StepStone examined, managed by 179 GPs, aim to have net zero emissions. “For investors, it is crucial they learn this terrain.”

Suzanne Tavill, StepStone’s head of responsible investing, told New Private Markets that GPs will find it “quite difficult moving forward” to promote sustainability and climate change-focused investment strategies “without having made a commitment to the net-zero initiatives themselves”.

“LPs will be more comfortable with managers that offer those thematic strategies and also have signed onto a net-zero commitment,” Tavill said. “All of these building blocks need to be done in a consistent and rigorous manner.”