LPs turn up the heat on GPs over climate change

Limited partners are increasing the pressure on fund managers to disclose more about the risks portfolio companies face from climate change, the PEI Responsible Investment Forum heard on Wednesday.

Just how seriously should fund managers take the threat of global warming? That was the question underlying much of the discussion on the opening day of the PEI Responsible Investment Forum in Berlin on Wednesday as speakers considered the impact of new recommendations from a Financial Stability Board task force that has called for greater financial disclosure of climate risks in annual filings.

Speakers described the report in June by the FSB’s Task Force on Climate-related Financial Disclosures (TCFD) as a potential game changer and said the TFCD proposals will encourage limited partners to increase pressure on general partners to come clean about the potential risk to their businesses from climate change.

Tatiana Bosteels, director of responsibility and head of responsible property investment at Hermes Investment Management, said the fund of funds manager, which has £4 billion ($5.4 billion; €4.6 billion) invested in private equity, has turned down potential private equity investments because it wasn’t satisfied that the general partner had given sufficient consideration to the risks to the business model from global warming.

“The private equity world is not doing enough to consider climate risks and we need to wake up to that, especially when you see the pressure from the FSB recommendations,” she told the forum.

Or as Anna Follér, sustainability manager at Swedish national pension fund AP6, put it: “It is part of our fiduciary duty. Climate change is affecting our investments and this is something we need to manage and that means we need GPs to manage it.”

“For the first time we are being asked to consider the impact on the company, not the impact of the company.”

James Stacey

The task force was set up nearly two years ago by the FSB out of concern about the financial risks that climate change poses to global markets.

The report in June, which has won backing from more than 100 business leaders and their companies, including leading banks and insurers, recommends that climate-related disclosures should be provided as part of annual financial filings.

The voluntary recommendations are structured around four thematic areas – governance, strategy, risk management and metrics and targets. They also call for asset managers and asset owners to work on scenarios that consider the consequences of a 2 degrees Celsius rise in temperatures as a result of global warming.

The key difference is that these guidelines are the first to consider the financial risk from climate change and its potential to destabilise global markets. This, speakers said, was a marked departure from “the carbon footprinting approach” which focuses purely on environmental damage.

“For the first time we are being asked to consider the impact on the company, not the impact of the company,” said James Stacey, partner at environmental consultancy ERM, which carries out climate risk assessments for general partners.

One of the members of the 32-strong TCFD task force was Stephanie Leaist, head of sustainable investing at Canadian pension fund CPPIB, which has $40 billion invested in private equity funds.

“We will be asking our GPs their views on climate change risk and what their strategies are for reducing those risks.”

Stephanie Leaist

She told the conference that the TCFD guidelines will have a direct impact on limited partners such as CPPIB: “We will be asked to report against these guidelines ourselves so we need to know the impact on our portfolios,” she said. “We are looking to better understand the risks in our private equity portfolios.

“This puts climate change firmly on the agenda of private equity and how the strategy of the company will be shaped and what metrics will be shaped.”

There are challenges, she said, especially regarding the task force’s call for “scenario analysis” – considering the implications of a 2 degree Celsius rise in temperatures against a 1.5 degree rise: “Scenario analysis is very much at an embryonic stage. There is no set method,” she said.

But she said that the CPPIB would be working “in partnership” with GPs to develop a framework for measuring climate risk: “We will be asking our GPs their views on climate change risk and what their strategies are for reducing those risks.”

And as panellists stressed, the risks are balanced against the business opportunities from climate change – such as the growth in smart technology to increase energy efficiency, advances in sustainable construction methods and greener forms of transport such as electric vehicles. All represent an investment opportunity for private equity, panellists said.

But there was a unanimous belief amongst the speakers that this TCFD initiative really does put the risks from global warming at the forefront of the private equity agenda, with pressure from LPs set to keep it there: “LPs are asking questions and we are seeing that in the conversations we are having with GPs,” said James Stacey of ERM. “The TCFD has opened up the debate about the risks we need to think about.”