*Ambition: Long-term goal for the company to be net zero emissions by 2050 or sooner.
Portfolio companies (PCs) can be deemed as “managed in alignment with net zero” when they meet the committed to aligning/ aligning/aligned/net zero criteria within the milestones outlined in the guidance.
As with all asset classes, the asset alignment target can be split into the five steps.
Strategies – Investors are recommended to include the following strategies in scope of the asset alignment target: sub-investment grade direct corporate lending, venture/growth debt, opportunistic credit, structured credit, and fund financing.
Influence bands – To account for the varying levels of influence different GPs and LPs will have, the alignment and engagement threshold targets use influence bands to establish objectives that are ambitious, yet reflective of the practical circumstances that each investment type faces.
Investors are recommended to develop an approach to assessing the alignment of their private equity portfolios.
When developing their respective approach, GPs may want to consider the robustness of Paris-aligned targets (and exceptions), appropriate alignment milestones, and the cadence of assessment against criteria.
GPs are recommended to assess PCs against NZIF’s alignment criteria.
*Ambition: Long-term goal for the company to be net zero emissions by 2050 or sooner.
Governance (HIGH IMPACT SECTORS ONLY): Board oversight for climate risk and execution of climate strategy. Climate risk
management and strategy are discussed by the Board at least once a year.
Disclosure: Annual disclosure to investors of scope 1, 2, and material scope 3 absolute GHG
emissions. Public disclosure is best practice.
Targets: 5– to 10-year Paris-aligned GHG emissions reduction target (Scope 1, 2, and
material Scope 3).
Emissions performance: Cumulative YoY reduction meets or exceeds the linear annual reduction established as the target for Scope 1, 2, and material Scope 3 emissions.
Climate strategy (HIGH IMPACT SECTORS ONLY): A proportionate plan is established that sets out the measures to deliver the target. The strategy should be quantified and include capex and opex required
to achieve targets.
Company with emissions intensity required by the sector and regional pathway for 2050 and who’s ongoing investment plan or business model will maintain this performance.
For the milestone years of 2030, 2040 and 2050, LPs are advised to assess and increase the amount of committed capital that GPs plan to manage in alignment with net zero.
On an annual basis, LPs should also calculate and disclose the percentage of invested capital being managed in alignment with net zero, as this reflects the reality of how investments are actually being managed. These calculations should be based on actual performance reported by GPs.
Once an approach to alignment has been established and a baseline assessment has been performed, investors are recommended to set:
An increased target is recommended to be set for 2040, and a target of 100% net zero by 2050.
Glide paths of target thresholds can be developed by an investor who should consider their respective influence band.
GPs and LPs may utilise multiple levers to inform their net zero investment strategy and to help private equity assets transition towards meeting the alignment criteria and achieving the asset alignment target. This includes portfolio company and GP engagement, and integrating measures into portfolio assessment and management.
It is imperative GPs and LPs continuously monitor progress against their alignment targets. Recommendations are made for tracking progress and enhancing transparency through disclosure.
Explore further IIGCC resources which offer additional guidance or information which is complimentary to the use of NZIF.