Setting the bar: PPF’s transition pulse check of private market managers

As an asset owner, the UK’s Pension Protection Fund (PPF) is rather unique – it protects some 8.8m members of defined benefit schemes from the risk of employer insolvency.

To do so, it invests a mix of levies, transferred or recovered assets and reinvested returns into two portfolios. One meets its current funding needs (matching), and the other targets future ones (growth).

Just over 20 years after it came to be, PPF published its first comprehensive sustainability report.

The report is a milestone, and it tells a tale about how £31.2bn under PPF management is fuelling the energy transition. Speaking with Net Zero Investor, PPF’s head of ESG and sustainability Claire Curtin shares the details.

Private transition

From an asset allocation perspective, the most palpable feature of PPF’s growth portfolio is a private markets tilt. Private equity for instance, accounts for 12% and alternative credit accounts for 16% (its largest exposure).

“We see climate as a particular priority for our investment process”, Curtin says, “we absolutely see it as a financially material risk that we need to consider within our investment decisions”.

That consideration brings PPF into the embrace of private markets. Powered by a conviction that much of the transition resides there.

“We see private markets as a way to access the real economy”, Curtin explains.

Private credit

Within private markets, private credit is a particular focus point. PPF’s private credit exposure is overweight relative to benchmark. Curtin says opportunities in this space have been on the rise – in part due to banks pulling their lending away from transition-linked sectors.

“For banks, when the clamp down came for their net zero initiatives, from a lending perspective, they were pulling away from certain sectors”, she notes.

That does not, she points out, change the underlying need for transition capital.

“We’ve seen for several years now that in some instances, banks have been stepping away from providing the debt. Large private GPs are taking their place. That is an opportunity”, says Curtin.

Two things for the PPF then, are simultaneously true. Climate risk is seen as financially material and private markets are a channel through which to address them.

Pulse survey

The PPF’s navigation of private markets is primarily steered by external managers.

For that reason, the fund conducted an inaugural transition assessment of private market managers last year. A ‘pulse survey’, as Curtin calls it.

“We felt we needed to understand what our managers were starting to think on this [transition plans]”, she says.

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The results are in. 51% of PPF mandates are in the hands of managers with a transition plan. 66% of managers had a firm-wide plan in place. 5% of its assets, managers reported back, were ‘unable to transition’.

The survey, a component of PPF’s own transition planning, yielded responses PPF was pleased with.

Managing managers

For managers, the survey was a timely reminder – that despite the ESG backlash and geopolitical headwinds, PPF’s expectations have not budged.

“We are still putting the same expectations on our managers. We are looking for evidence from them, that the analysis and the engagement are still happening”, Curtin clarifies.

On its part, PPF has retained the ‘red lines’ of manager expectations on climate.

“They’ve got to have a process in place for considering material risk and to the extent possible, they’ve got to evidence stewardship around higher risk positions”, she outlines.

For PPF’s managers, the US-led backlash has seemingly internalised a hitherto external exercise.

Unfolding the aftermath of exits from climate alliances, Curtin says, “even if they are pulling out of alliances, we are being told that they are now sufficiently resourced internally”.

Crucially, a divide across the Atlantic for managers, she affirms, is not evident.

She cites the example of EDCI – an initiative to get private equity managers to produce standardised sustainability data. When PPF asked its managers to sign on, American managers welcomed it.

For PPF’s private market optimism, these are healthy signs. If the backlash had fundamentally eroded climate risk governance processes within managers, Curtin’s ‘pulse survey’ results would paint a different picture.

Curtin’s view is that there is more to play for.

A gold standard for credible transition plans remains elusive. Liquidity in some private asset classes is a pronounced risk and data visibility is a work in progress. Even still, the survey will give PPF reasons to build an optimistic private market thesis, cautious as it might be.