ESG investor group wants market reforms

COPENHAGEN: Global ESG investors with US$9.5 trillion under management say it’s time to demand more accountability from private markets, amid evidence they’re increasingly absorbing fossil-fuel assets.

The Net Zero Asset Owner Alliance (NZAOA), whose 89 members include CALPERS, Zurich Insurance and Munich Re, is expanding its protocol to include all private asset classes.

It previously excluded debt funds, directly held real estate debt funds and residential mortgage loans.

The update, part of an ongoing expansion of asset classes targeted by NZAOA, means investors agree to a series of measures that add pressure on private markets to cut portfolio emissions.

The current lack of transparency around private holdings raises competition issues and imperils crossborder efforts to limit global warming to the critical threshold of 1.5 degrees Celsius, said Gunther Thallinger, chair of NZAOA and a director at Allianz SE, the parent of Pacific Investment Management Co.

“I’m really very concerned,” he said in an interview. “This is why we advocate so much that there should be reporting requirements and also regulatory requirements.”

The value of private credit deals in the oil and gas industry has grown exponentially, rising to Us$9bil in the 24 months through the end of 2023, up from Us$450mil arranged in the preceding two years, according to data compiled by analytics company Preqin.

That’s as many banks retreat from the sector in response to regulatory and investor demands.

The build-up of high-carbon assets inside private markets is “worrisome for us because at the end, we are investors and we need to show investment performance overall,” Thallinger said.

And the more fossil-fuel assets end up in private hands, the harder it gets to pressure the sector to reduce its emissions, according to NZAOA. Engagement efforts suffer “significantly”, Thallinger said.

Global adoption of reporting standards set by the International Sustainability Standards Board, under the auspices of the International Financial Reporting Standards Foundation, would contribute to a more level playing field, he said.