Investors need to be able to monitor whether their private markets portfolios are being managed in line with their climate ambitions, says Natasha Buckley at HarbourVest Partners
LGPS pension funds that have established, or are in the process of establishing, net zero goals are considering the role private markets investments should play in their long-term strategy.
Private markets fund managers face several key challenges when setting formal net zero or decarbonisation targets: a lack of quality emissions data; a diverse landscape of frameworks, methodologies, and reporting platforms; and unique operational challenges such as illiquidity constraints and tension between high-growth expectations and the need for emissions reductions. As a result, many of these GPs pursue decarbonisation in their portfolios without aligning to broader initiatives, reducing transparency on progress in the private markets ecosystem.
However, allocators with net zero ambitions need a data-informed view of alignment within their private markets portfolios, regardless of high-level policy commitments from fund managers. Furthermore, GPs can play a critical and unique role in the transition to a net zero economy by investing in climate solutions businesses and working with companies to establish emissions baselines, develop decarbonisation strategies, and set targets at critical times in the company’s lifecycle. The ability to drive operational improvement among portfolio companies to contribute to the net zero transition differentiates private markets firms, and these efforts can be captured through data.
Setting standards
At HarbourVest, we believe it is important that we use our influence to support the development of industry standards for sustainable investing. A consistent approach to best practice, regulation and data collection can streamline individual firms’ efforts and enhance data availability and comparability throughout private markets. We have been a proud member of the Initiative Climat International (iCI) since 2020 and our own Natasha Buckley served as chair in 2022 and 2023, overseeing strong membership growth, the development of global chapters, and an expanding library of peer-reviewed resources.
HarbourVest proudly co-led the development of the Private Markets Decarbonisation Roadmap (PMDR) with iCI alongside Bain & Co and the Sustainable Markets Initiative’s Private Equity Task Force, whose membership includes HarbourVest managing director and EMC Emeritus Peter Wilson. The PMDR was released in November 2023 and has since been updated to PMDR 2.0, released in November 2024.
The PMDR provides a common language for PE firms to disclose their assets’ decarbonisation evolution, including earlier stage progress on emissions collection and reduction. The PMDR is aligned with existing net zero frameworks, but gives firms the flexibility to decide what and how to disclose.
With the objective of incentivising real action, the PMDR’s Alignment Scale poses three essential questions to classify portfolio companies along the decarbonisation trajectory:
- What measures has the company taken to reduce greenhouse gas emissions?
- Is there a recognised transition pathway for this company?
- Do the company’s operations enable the net zero transition?
Following the initial release of the PMDR, HarbourVest has worked to encourage adoption and articulate the potential benefits of widespread use. As part of our annual ESG data collection in 2024, which is aligned with the ESG Data Convergence Initiative (EDCI), we used the opportunity to raise awareness among our GP base about the PMDR and were pleased by the level of engagement we achieved.
We contacted 201 GPs for ESG data, which led to more than 40 calls between June and September to discuss the PMDR framework. Through these discussions, we found that 19% of GPs were already using the PMDR framework or planned to adopt it over the next year. Another 15% of GPs were open to engaging further with the framework. During its initial launch year, we found that GPs were mostly using the PMDR framework to communicate portfolio status internally, with their investment teams and portfolio companies. Some GPs were already starting to report on PMDR in LPAC materials and public sustainability reports.
We continue to engage with the PMDR, responding to early feedback and recognising that a framework requires continuous improvement and evolution to adapt to market practices and investor expectations. These efforts include:
- Advocating through the iCI for a standard data-sharing template to support standardised LP-GP disclosure. This was launched as part of the PMDR 2.0 in November 2024.
- Creating a sample reporting module for LPs to demonstrate how the PMDR could aid in monitoring decarbonisation progress for a broadly diversified LP. This includes showing the number of companies across the following stages of the PMDR: not started, collecting data, preparing to decarbonise, and aligning/aligned to net zero.
- Conducting two regional client webinars highlighting GP application of the PMDR and informing over 20 LPs about the PMDR through one-to-one engagement interviews.
By gathering industry traction behind a common framework, we can gain insight on portfolio alignment with the net zero transition and support effective progress. This summer we will start collecting PMDR disclosures from our GPs to better understand portfolio exposures across the decarbonisation journey spectrum.