Natalie Winterfrost, director at Law Debenture, says TCFD reporting and stewardship standards still lag behind those achieved in public markets
In 2022, large pension schemes were required to start publishing TCFD reports. Around the same time, The Pensions Regulator guidance drove schemes to set stewardship priorities and actively engage with investee companies, via asset managers, on financially material ESG matters.
As a pension trustee, my private markets exposures – across private debt, private equity and real assets – have certainly provided me with some challenges in this regard. Things have improved, but not as far or as fast as I would like. There is still work to do.
In terms of carbon reporting, our consultants initially reported private markets holdings as either ‘data unavailable’, or created proxies using public market data. Many of my schemes have set objectives to improve data quality, largely with these private markets exposures in our sights.
The 2022 gilt market crash left us overweight to private markets, meaning such data gaps became very significant to our overall data quality. Despite the reporting obligations on pension schemes, private markets managers seemed slow to respond.
Partial progress
This past year has been something of a turning point; for the first time my schemes are largely able to include data supplied by their private markets managers rather than rely on their consultants to create proxies for it. This has been important to achieving an accurate picture of emissions ahead of many schemes’ 2030 targets.
How much of the data provided is actual rather than estimated data is something I still need to better understand. It’s definitely been a move in the right direction for most, but that is not to say there aren’t laggards out there. I have legacy private equity exposures – in some of the more esoteric asset classes where emissions reporting methodologies are still evolving – and even some private credit managers are letting me down. Being a laggard in these areas would certainly make me hesitate to re-up into a new fund.
While carbon emissions data may be improving, trying to engage with private market managers on stewardship remains a real mixed bag. I find it particularly disappointing when, for example, a fund manager launches a new article 8 private market vehicle, with all the supporting processes in place to engage in stewardship activities, but won’t extend this to older vintages.
For me, arguing that ‘there is nothing we can do’ when capital is already deployed doesn’t wash. And it makes me wary, in any case, of investing in future funds if the engagement around ESG is only at the point of committing capital, rather than an ongoing oversight process. Regardless of whether debt or equity capital is being provided, there has to be influence over investee companies, which may need to keep options open for future funding.
Being a laggard in these areas would certainly make me hesitate to re-up into a new fund
Natalie Winterfrost, Law Debenture
Elsewhere, biodiversity, the eradication of modern slavery and DEI are stewardship priorities, and reactions from private market managers when seeking confirmation that they are actively engaging in these areas lags public markets.
I see private markets investments as having real potential for delivering impact across environmental, social and governance (ESG) matters in line with the stewardship priorities of my schemes. This should not be restricted to purely ‘impact’ funds but be an integral part of the investment and risk management process.
Private markets managers should be able to provide good examples of engagement across significant ESG risks, which I can in turn disclose on my implementation statements. We are not there yet.