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Private Debt

Below is NZIF 2.0 implementation guidance for private debt. For approaches to achieving the asset level targets and more detailed guidance, please click on the NZIF 2.0 guide below.

Alignment targets

  • Asset alignment target: A percentage of invested capital (GPs), committed capital (LPs), or financed emissions to be ‘managed in alignment’ with net zero by 2030.
  • Engagement threshold target: Complete the specified engagement actions for all (100%) applicable private equity investments (see guidance).

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.

1. Setting the scope

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.

2. Assessing alignment

Investors are recommended to develop an approach to assessing the alignment of their private equity portfolios.

General partners

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.

Criteria underpinning alignment assessment
Key
  • Green ticks represent when a criterion is required to be fulfilled for a particular alignment category to be obtained.
Criteria
Committed to aligning
Aligning to a net zero pathway
Aligned to a net zero pathway
Achieving net zero

*Ambition: Long-term goal for the company to be net zero emissions by 2050 or sooner.

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.

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 Committed to Aligning milestone, the board should acknowledge the importance for the company to take action toward a net zero future and encourage the company to begin exploring pursuit of Aligning and Aligned criteria.
Limited partners

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.

3. Setting the target

Once an approach to alignment has been established and a baseline assessment has been performed, investors are recommended to set:

  • For GPs, a percentage of invested capital and/ or financed emissions to be “managed in alignment with net zero” by 2030
  • For LPs, a percentage of committed capital and/ or financed emissions to be “managed in alignment with net zero” by 2030

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.

 

% of invested/committed capital" managed in alignment with NZ by...
Asset classes
Band
2030
2040
2050
2060
DIRECT
  • GP direct corporate lending
  • GP venture and/or growth debt
1a
40% Invested capital
75% Invested capital
100% Invested capital
40% Invested capital
1b
20% Invested capital
50% Invested capital
100% Invested capital
40% Invested capital
1c
10% Invested capital
40% Invested capital
100% Invested capital
40% Invested capital
DIRECT
  • GP private structured credit
  • GP fund/NAV financing
1d
10% Invested capital
40% Invested capital
100% Invested capital
40% Invested capital
INDIRECT
  • GP continuation funds across these strategies
  • GP fund of funds
  • LP investments across private credit (direct & indirect)
  • LP co-investment
  • LP-led secondaries
2a
28% Committed capital
75% Committed capital
100% Invested capital
40% Invested capital
2b
18% Committed capital
65% Committed capital
100% Invested capital
40% Invested capital
2c
10% Committed capital
55% Committed capital
100% Invested capital
40% Invested capital
"Committed capital is forward looking metric

4. Delivering the target

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.

5. Monitoring the target

It is imperative GPs and LPs continuously monitor progress against their alignment targets. Recommendations are made for tracking progress and enhancing transparency through disclosure.

 

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Useful resources

Explore further IIGCC resources which offer additional guidance or information which is complimentary to the use of NZIF.

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