Three quarters of global LPs embed climate risk in private markets mandates
Large institutional investors are increasingly requiring private markets managers to integrate climate risk into their investment processes, amid a growing push for transparency in a once opaque market
Nearly three quarters of the world’s biggest private market allocators (68%) are now embedding expectations on managing climate risk into their private market mandates, according to new research by climate risk platform Unwritten, a London-based data provider on climate risk. The report indicates growing investor demand for improved disclosures and risk management in private markets.
The report, Shifting Expectations — Limited Partners and Climate Financial Risk, analysed the policies of the 100 largest limited partners (LPs), who collectively channel $2.6trn into private markets. It found that 68 of these institutions explicitly require managers to assess climate-related financial risks, while a further four strongly encourage it. The Abu Dhabi Investment Authority, for example, embeds climate assessment in due diligence, portfolio reporting and planning.
It highlights climate change as a systemic financial threat, with long-term investors such as Temasek and Cambridge University Investment Management stressing that climate risks are inseparable from fiduciary duty. “ESG integration is predominantly achieved through the selection and appointment of new investment managers, and monitoring through the assessment of, and engagement with, our existing investment managers. … We explicitly assess an investment manager’s maturity on two thematic topics: climate change and modern slavery” one survey respondent for the Australian Retirement Trust said.
Earlier this year, PRI released a detailed guide on climate risks disclosures for its signatories, revealing that real asset investors show a significantly higher uptake of climate disclosures while only 22% of private equity investors disclose climate risks.
Regional divides
While climate requirements are becoming mainstream, the latest report by Unwritten shows sharp regional divides. Outside the US, 80–100% of large LPs demand climate risk assessments. In the US, just over half do so, reflecting the political backlash against environmental, social and governance (ESG) considerations. Even so, investors such as the New York City Comptroller’s office have doubled down, pledging not to retreat from climate action despite opposition.
The study also found that LPs are more likely to require climate risk assessment than specific emissions targets. Seventy-two out of the top 100 insist on risk analysis, but only 62 expect or encourage emissions goals, and none mandate membership of net zero alliances. Many emphasise “single materiality”, focusing on the financial risks of climate change to portfolios rather than the environmental impact of investments.
Shift to single materiality
The report also reveals an important shift in strategy, managing climate risk has a clear priority over reducing emissions. Whilst 72 of the 100 largest LPs publicly state a requirement or expectation for climate risk assessment, only 62 expect or recommend an emissions target. Moreover, one require membership of Net Zero Asset Managers or an equivalent initiative.
In practice this means that LP’s expect climate risks to be reported, with quantitative as well as qualitative risk assessment, about half of survey respondents expect their managers to complete TCFD reports. The also want to see climate risk to be integrated into the investment process and expect active risk management throughout the hold period.
Such standards, the report argues, are more than compliance. They can help managers avoid costly mistakes, strengthen portfolio resilience and create competitive advantage. As the New York State Common Retirement Fund shows through its climate KPIs, climate risk is increasingly treated as an essential part of good governance.
