Private markets' involvement is essential for achieving net zero, according to Mahesh Roy, a representative at IIGCC.
In the realm of private market investments, a general partner's ability to appoint a majority of voting seats on a portfolio company's board can significantly influence a company's management, as revealed in a recent study. However, the lack of a strong enabling environment, such as regulations around climate disclosures, poses a challenge in private markets compared to public markets.
The Institutional Investors Group Climate Change (IIGCC) aims to bridge this gap by offering guidance to investors on integrating climate change risks and opportunities into private markets investments. The IIGCC's material, covering both private equity and private credit, provides insights into two main engagement strategies: a general partner-limited partner engagement and interactions between general partners and portfolio companies.
In private debt, the adoption of net zero practices is not just a risk management tool, but also a value add in relationship management. To this end, a "three-way" engagement model is encouraged, involving engagement between general partners, portfolio companies, and private equity sponsors where applicable.
Communication, dialogue, and partnership are the cornerstones of successful engagement in private markets. Regular communication and transparency regarding the transition of portfolio companies are the most important factors in these engagements. General partners and limited partners should report progress towards established net zero targets to foster transparency and accountability.
In private equity, limited partners can engage with general partners to drive net zero commitments. A general partner with limited or no voting seats may have less influence on the direction of the company, but can still engage with co-owners of portfolio companies where they have less influence.
The need for more and better quality data is a common challenge in both public and private markets. Ideally, data should flow from portfolio company to general partners to limited partners every annual reporting cycle. This flow of information facilitates informed decision-making and effective engagement strategies.
The IIGCC's guidance also introduces an "influence band" classification system, which classifies an investor's relationship with a portfolio company as either "direct influence" or "indirect influence". This system allows investors to determine their relationship with a portfolio company and tailor their engagement strategies accordingly.
It's worth noting that only 30 of the world's top 100 carbon emitters are listed on a stock exchange. This underscores the importance of private market engagements in efforts to reach net zero.
The search results do not provide specific information about the IIGCC's recommendations for investor engagement tools in private markets. However, such groups typically recommend tools that facilitate dialogue, disclosure, and responsible investment practices.
In conclusion, private market investors can have a material impact on companies and their orientation towards net zero. By adopting enhanced engagement strategies and leveraging the right tools, these investors can play a crucial role in driving the transition towards a more sustainable future.
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