In this guide you will learn:
Asset managers play a crucial role in catalyzing the transition to a green economy. With assets under management projected to exceed $11 trillion by 2026, the industry possesses substantial influence to fund the climate transition.
This influence hinges on key values such as commitment, resilience, and value creation, which are integral to fostering a sustainable business model. The adoption of such models not only ensures long-term viability but also yields higher financial returns over time.
As reporting standards and frameworks evolve, the ultimate goal remains the same – to show credible alignment with the Paris Agreement.
But how can investors involve their portfolios in this journey? What tools and support can they offer to help them to measure and act on their carbon footprint? We take a closer look.
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In the wake of the European Green Deal, asset managers are facing a complex regulatory landscape when it comes to climate-related reporting obligations. Below we give a handy summary of the key standards that apply to investors, including the Sustainable Finance Disclosure Regulation (SFDR) and the Corporate Sustainability Reporting Directive (CSRD).
Note that while some regulations may not directly apply to specific investors, the underlying data collection requirements, such as the Principal Adverse Impact (PAI), often become standard practices.
This is why understanding these regulatory frameworks is crucial for asset managers to navigate their reporting obligations effectively.
SFDR, a cornerstone of the EU’s sustainable finance agenda, mandates enhanced sustainability disclosures and tackles greenwashing.
Level 1, effective March 2021, focuses on financial organizations, including asset managers, disclosing sustainability risks, principal adverse impacts (PAIs), and integrating sustainability into remuneration policies. PAIs include mandatory indicators, some of which involve the exercise of conducting an exhaustive carbon footprint.
SFDR Level 1 disclosure requirements for products relevant to asset managers are explained below:
| Article 6 Fund | These funds have no explicit Environmental, Social, Governance (ESG) objective. They are considered default classifications where sustainability is not a primary aim. |
| Article 8 Fund | These products prioritize environmental or social traits within their investment approach. |
| Article 9 Fund | These funds specifically target environmental or social investments as their primary objective. They are subject to compliance with the ‘do no significant harm’ (DNSH) principle. |
Level 2, from early 2023, demands further details on sustainability risk integration and performance quantification.
For more detail on SFDR requirements, take a look at our dedicated resource.
We also have a useful comparison of the SFDR and the UK SDR.
The CSRD builds on the Non Financial Reporting Directive (NFRD) drawing on various frameworks and cohabiting with other standards such as the The Global Reporting Initiative (GRI), and the International Sustainability Standards Board (ISSB). Its more detailed requirements include reporting on all three scopes of emissions to address wider sustainability issues, improving data availability on environmental risks, labor practices, supply chain management, and business conduct.
Note that CSRD and the SFDR are closely linked, as the CSRD expands corporate reporting requirements to encompass asset managers, while the SFDR broadens asset managers’ reporting responsibilities to include retail investors of their funds.
For more detail on CSRD requirements, take a look at our dedicated resource.
The EU Green Taxonomy serves as a crucial framework for asset managers, enabling them to transparently report on the sustainability impact of their economic activities using the six key sustainability principles:
It’s both a tool that finance actors will use in the future to take sustainability into account in their investments strategies and a disclosure requirement applying to both asset managers and firms.
The Green Asset Ratio and Indicators thresholds are especially used in investment screening both in private and listed assets and in due diligence processes for companies in dealflow.
It’s worth noting that the above regulations are closely linked, and their full impact will be felt when they are fully implemented and matured. For example, the EU Taxonomy is still being developed and the current version has its limitations, but its completion and application will greatly strengthen the effectiveness of other related regulations – while financial institutions are waiting for the revamped SFDR classifications.
The logical approach to address decarbonization and meet the demands of the above frameworks, is through the “measure, act and report” method, with guidance available for each step from various frameworks and initiatives. These offer valuable guidance on implementing climate strategies, particularly for investors.
The GHG Protocol and PCAF are two widely used frameworks for measuring and managing greenhouse gas emissions in the finance sector.
Category 3.15 of the GHG Protocol
The GHG Protocol is a standard designed to help you identify and calculate your firm’s carbon footprint across your operations and value chain – including the investment portfolio.
It has divided scope 3 into 15 categories, with category 15 being designated as “Investments” and intended for banks and investment funds. This section states that financed emissions must be incorporated into the company’s GHG declarations and reduction strategy.
The Partnership for Carbon Accounting Financials (PCAF)
PCAF is an industry-led initiative to enable financial institutions to consistently measure and disclose their financed emissions.
In November of 2020, the PCAF released the first edition of the Global GHG Accounting and Reporting Standard for the Financial Industry. It draws upon the GHG Protocol to establish a framework for measuring and attributing emissions stemming from particular asset classes.
The methodology aims at transforming absolute emissions of investees into financed emissions for the investor by accounting for the percentage of ownership – using the allocation key, which is outstanding amount / total value – whatever the asset classes, allowing credit instruments and project finance to incorporate time in the calculations.
Financed Emissions
Financed emissions are your portion of emissions from the asset you invest in. In other words, your financed emissions represent your share of emissions associated with the assets that you have invested in. This means that financed emissions reflect the contribution of emissions that can be attributed to your investment portfolio. For financial institutions, financed emissions represent over 95% of their carbon footprint.
Investors have historically relied on the Science Based Targets initiative (SBTi) to guide portfolio companies in achieving ambitious decarbonization goals. Established in 2015 by leading organizations such as the CDP and the United Nations Global Compact, SBTi has swiftly become the preferred standard among private market firms.
Note that SBTi can apply to companies and financial actors, but in different ways.
Companies have three options for defining science-based targets:
The Net Zero initiative, championed by organizations like the Net Zero Banking Alliance (NZBA), Net Zero Asset Managers (NZAM), and Net Zero Asset Owners (NZAO), represents a collective commitment to achieving carbon neutrality by 2050. For asset managers, this initiative signifies a fundamental shift towards integrating climate considerations into investment strategies.
Science-Based Targets (SBTs) are short-term objectives established by businesses to match the necessary reductions for limiting global temperature rises to below 2°C compared to pre-industrial levels. Conversely, Net Zero represents a more extended goal aimed at fully offsetting emissions, inclusive of absorbing any remaining emissions through climate removal methods.
While the guidance has allowed significant improvements in driving decarbonization efforts, investors wishing to offset have to report their strategy side by side – meaning leveraging granular trajectories per scope or even per category – and then compute removed or avoided emissions. A reminder that carbon neutrality couldn’t be achieved at company level and cannot be a sum of positive emissions and removed emissions.
The Assessing Low-Carbon Transition (ACT) initiative fosters climate action by facilitating benchmarking against sophisticated, science-based criteria. ACT offers a comprehensive, future-oriented framework to assist companies in aligning their climate transition strategies with low-carbon trajectories.
Under the ACT assessment, business emissions targets are scrutinized for their alignment with various climate change scenarios. ACT aims at adding depth to absolute or percentages commitments: the evaluation encompasses analysis of historical and anticipated emissions trends, investments in low-carbon endeavors and research, stress-testing portfolios, transition strategies, interactions with suppliers and clients, and advancements in developing low-carbon business models.
The methodology includes qualitative evaluation and suggestions for improvements and uses a scoring measurement system to grade the actors under analysis – particulary useful for brown-to-green investment strategies and complex fast-growing sectors.
For more information, take a look at ACT’s dedicated page.
The Task Force on Climate-related Financial Disclosures (TCFD) is a global initiative aimed at enhancing the transparency of climate-related risks and opportunities within financial markets. While it has been recently disbanded, its framework continues to be widely used for reporting.
Established by the Financial Stability Board (FSB), the TCFD provides a framework for organizations across sectors to disclose information regarding their climate-related risks and opportunities across four key areas: governance, strategy, risk management, and metrics and targets.
The idea of TCFD is that financial actors will be able to use the disclosures of companies (written according to its requirements) to choose investments knowing what their climate related risks and opportunities are.
For more information, take a look at our dedicated resource on the TCFD.
In conclusion, the bottom line is meeting regulatory requirements while demonstrating the alignment of your climate policy with the Paris Agreement, thus driving the value of your investments. Striving to achieve the quality and transparency of climate-related frameworks is essential as it signifies best practices in climate mitigation strategy.
In the pursuit of an effective investor-level decarbonization strategy, laying a solid foundation is crucial. To align with your climate ambitions, the governance of your climate policy, your climate knowledge and understanding of target settings at investor and asset levels are essential to make informed decisions and put in place efficient action plans.
To embark on a successful journey towards climate action, it’s vital to lay solid groundwork within your organization. Here is how:
Establish solid climate governance – Start by assembling a dedicated team armed with clear objectives and timelines, project management tools, and the necessary resources. To foster a culture of internal development and climate responsibility, establish clear internal communication around your climate ambitions including commitment from top leadership.
Embrace a vision for the future – Align your objectives with the ambitious goals of the Paris Agreement. Involve support and investment teams to ensure alignment with your sustainability vision. Keep your sights set on the long term, recognizing the potential impact of your climate initiatives on budgets and operations. Examine the possibility of setting up remuneration policy linked to climate objectives.
Consider climate knowledge as a must – Invest in climate training for your team or allocate time for skill acquisition. Foster knowledge sharing across teams, promoting ESG and climate awareness through engaging educational initiatives. Don’t hesitate also to seek external expertise when needed to bolster your internal capabilities.
Gain an initial grasp of your portfolio’s climate maturity – Kickstart your efforts by conducting an initial climate status assessment of your portfolio companies, for example based on estimations. Use these estimations to prioritize action in carbon intensive sectors, high absolute emissions or large-cap investments to maximize your climate policy’s impact.
Connect with your peers – Be an active member of the community of asset managers committed to climate action. Use the resources made available by asset manager associations, and attend events and webinars organized by industry professionals and experts on technical and current climate issues. Participate in working groups, share your experiences and insights.
As mentioned above: SBTi can apply to companies and financial actors, but in different ways.
The below diagram from the official website shows the trajectory for private equity firms, which will be relevant for most asset managers.
In the initial stages outlined in the diagram above, investors should first apply the same principles and efforts to their own operations as they do to their portfolio companies. This involves conducting a comprehensive assessment of their own carbon footprint, encompassing scopes 1, 2, and 3 (categories 1 to 14), and establishing targets at the investor level to address their corporate emissions.
Adopting this approach sets a powerful example for portfolio companies, demonstrating a commitment to leading by example in climate action. Moreover, engaging in these exercises enables investors to deepen their understanding of the methodological intricacies involved in calculating carbon footprints and setting credible reduction targets.
Based on the footprint estimations that you’ve already done, your firm can then choose how it wants to manage its mitigation targets at investor level.
SBTI for example, explains that PE firms have different options here. Firms that: ‘primarily hold private equity direct investments will likely need to cover most of their total investment activities by portfolio science-based targets (SBTs). For multi-strategy private equity firms, multiple methods may need to be applied to simultaneously set SBTs across all the required asset classes.’
Note that the scope of a firm’s targets needs to be consistent with the scope required by the chosen method – otherwise, portfolio comparison and peer groups might not be relevant.
When tracking progress towards climate goals, it’s essential to grasp the distinctions between intensity and absolute targets, as well as the implications of aiming for a 1.5°C or 2°C pathway.
It’s advisable to set distinct targets for Scope 1, 2, and 3 emissions, whether absolute or intensity-based.
Absolute Emission Targets
Absolute emission targets entail a specific reduction or avoidance of emissions over a defined period, irrespective of business growth or annual profits. These targets are quantified in terms of total emissions, providing a clear commitment to reducing environmental impact.
Example: Firm A commits to reducing its financed emissions by 40% by 2030.
Intensity-Based Emission Targets
Intensity-based emission targets focus on reducing emissions per unit of economic activity. These targets allow for adjustments in emissions reductions based on business growth or changes, such as mergers or acquisitions, ensuring flexibility while pursuing sustainability goals.
Example: Firm B aims to eliminate 5 metric tons of CO₂ per $1 million invested.
Explore our dedicated resource for further insights on target-setting methodologies.
Additional Intensity metrics
In addition to absolute emissions reduction targets, investors can leverage intensity metrics to measure and manage emissions relative to key business drivers. These offer valuable insights into the efficiency of emissions reduction efforts and enable investors to identify opportunities for optimization.
Intensity metrics can be particularly useful for younger companies experiencing rapid growth, as they provide a more nuanced understanding of emissions performance, taking into account fluctuations in business activity.
Physical intensity is the value of absolute emissions divided by a value of physical activity or output, expressed as tCO2 e/MWh, tCO2 e/tonne product produced.
Weighted Average Carbon Intensity (WACI) measures a portfolio’s exposure to emissions-intensive companies, expressed as metric tons of CO2 equivalent per million dollars of revenue (tCO2 e/€M or tCO2 e/US$M).
Economic emissions intensity, described in the PCAF Standards, is the amount of financed emissions divided by the portfolio value, providing a normalized carbon footprint measure.
Implied Temperature Rise (ITR) assesses how well portfolio holdings align with global climate goals by evaluating their collective carbon budget and comparing it to actual emissions, converted into temperature rise degrees.
Once you’ve established your task forces, conducted estimations of your scope 3.15 (investments), and outlined your targets and key performance indicators (KPIs), the next crucial step involves leveraging this groundwork to support and guide your portfolio companies in developing their own climate strategies.
As an asset manager, effectively supporting your investees in their decarbonization journey is paramount for aligning with sustainability goals. Here’s what to bear in mind:
First and foremost, it’s essential to consistently communicate that every company plays a role in climate change mitigation, regardless of size or industry. Be prepared to present your climate ambition and to justify your willingness to improve your portfolio climate maturity as you may encounter resistance or disinterest, both from your investees and your own shareholders. Prioritize your efforts taking into consideration the following:
Climate strategies tailored to company maturity: Recognize that companies vary in their climate maturity. For less mature companies, encourage the implementation of good practices gradually, starting by calculating Scope 1 and 2 emissions, then progressing to Scope 3 upstream and downstream. Utilize tools to facilitate this process and continuously improve footprint quality.
Emission influencers: Companies that have control or influence over significant Scope 3 emissions have more ability to make decisions. Conducting inventory for critical portions of the Scope 3 footprint may be necessary as data quality improves.
Sustainability drivers: You may find that many of your portfolio companies are at an inflection point when it comes to sustainability. Some may be actively looking to embark on their decarbonization journey for various reasons:
Timing: Flexibility in timing is crucial when calculating emissions across the investment value chain, as companies will have different timeframes for gathering data.
Advising your portfolio companies on decarbonization requires a comprehensive and engaging approach. Start by involving all teams within the company, emphasizing the importance of internal communication, education, and change management. Focus especially on departments like purchasing, which play a crucial role in emissions reduction.
Utilize deep insights and robust tools to pinpoint carbon hotspots and model the impact of various reduction strategies. Tailor your analysis to the industry-specific stakes; for example, if your portfolio company operates in tech, collaborate with Green IT specialists to effectively address technical aspects.
Leverage public resources and share materials that are most relevant to your portfolio companies. For instance, effective waste management and supplier eco-conception are crucial in hospitality, while reducing business travel emissions is more significant for a consulting agency. Sharing research studies, successful initiatives, and peer group brainstorming sessions can provide impactful paths to reduction.
Recognize that every portfolio company has a unique decarbonization journey. Create channels for sharing knowledge and learning from the experiences of others within the portfolio. This collective approach can significantly enhance the effectiveness of decarbonization strategies across your investments.
Your portfolio companies may find Sweep’s Decarbonization Guide useful.
When running dealflow or yearly analysis of your investees, share the results of carbon footprint estimations with the details per category especially for those without existing climate data. Based on their sector and revenue, they can also get an idea of how they position compared to the initial estimation.
While you’re identifying the main sources of a company’s emissions, you should simultaneously think about the most effective methods of reducing them. This involves documenting the cost of investment and the potential benefits that can be gained from these actions, such as cost savings from energy efficiency, an increase in market share, and a reduction in regulatory and climate-related risks. It’s important to explicitly connect decarbonization measures to value creation in order to motivate both internal and external support for these initiatives.
Investees often have queries regarding carbon accounting rules, data requirements (physical vs. monetary), and organizational boundaries. Providing training, education, and personalized support in addressing these questions can be invaluable. Whether through digital resources, consulting services, or direct interaction, offering time and materials to build knowledge bridges any gaps for those lacking time or expertise.
It’s important to find tools that can support with the following:
Centralized data management: Consolidating and managing various types of extra-financial data that are used as a foundation for all your investees (or most) for consistency and comparison
Customizing data collection: Supporting companies to select the right data based on their organization structure and data maturity.
Identifying emission hotspots: Highlighting where to prioritize reduction efforts.
Facilitating collaboration: Inclusion of collaboration features to enable seamless communication among users.
Ensuring data integrity: Quality controls and regular updates to help maintain data accuracy.
Whether it is during a due diligence period, before an exit or preparing for new funding rounds, private markets often have privileged contact with their portfolio, sometimes as a majority shareholder, as a Board member or a trusted advisor – investors can and have the responsibility to drive their investee in the right direction and require both commitments and proofs of realization as part of the deal conditions.
We have seen credit actors creating sustainability-linked coupons, mirroring banks, or offering mezzanines each year based on climate performance and completion of promises; or infrastructure players providing additional funding under the condition of using renewable energy projects, such as solar or wind farms.
Some private equity firms offer services that portfolio companies have to pay back in case of non completion – others just pay entirely for the carbon footprint measurement services (whether they are consulting or digital).
“Sweep’s emission monitoring dashboards make it easy for asset managers to communicate and answer questions from our investors about financed emissions, carbon intensity, and data quality. The software enables us to filter by branch, by fund, or by company, which will be useful to simulate different reduction scenarios.”
Emilie Huyghues Despointes
ESG Officer at MV Credit
You can read more about MV Credit’s journey with Sweep here.
Supporting your assets in their decarbonization journey is crucial for driving sustainability and achieving climate goals. We hope you’ve found this guide useful in outlining the necessary steps and tools to help you engage and assist your investees in reducing their carbon footprints.
With Sweep’s support, you can lead by example in decarbonization, ensuring your portfolio companies not only comply with regulations but also contribute to a sustainable future.
