2021 ESG Annual Report

also focus on how they, as active owners of each security and sector in a portfolio, are supporting companies in their transition to net zero. What is a climate solution? You do not necessarily need to follow a taxonomy to define a climate solution. You should ask whether a company’s products and services are enabling the substitution of lifecycle emissions, and understand that product or service’s carbon abatement potential versus the current standard. This provides an idea of its total addressable or serviceable market. In evaluating such carbon abatement potential, the council recommends applying the same margin-of-safety framework that investors use: is there confidence in both emissions reduction measurement and execution? Thresholds may differ based on sector, manufacturing process and measurement methodology, and may change as technologies mature and scale. Do the definitions of net-zero alignment, fair share and climate solutions apply consistently to private equity? The proposed definitions are generally applicable in a private equity context, but there is nuance around the pathways that companies can take to help decarbonize the economy. Here, in the context of NB’s private equity platform model, a portfolio coverage approach makes sense but may still encounter challenges given evolving portfolios and net asset values. Also, many private companies are growing and scaling, which can increase their absolute emissions even if their carbon intensity falls. A sectoral decarbonization approach is appropriate at the portfolio company level, but relevant sectoral targets are not yet widely available, and at the fund level, portfolio coverage is more feasible. Rather than excluding higher-emitting sectors, it may be better to support their transition. What were the key takeaways from the UN Climate Change Conference (COP26), both globally and for the U.S.? Globally, COP26 achieved several key outcomes: the establishment of the Glasgow Finance Alliance for Net Zero, commitments from 190 countries and companies to phase out coal, and a pledge by more than 100 countries to halve deforestation by 2030. For context, 90% of global GDP now has a net-zero target, up from 30% when the U.K. took over the COP presidency.

As we look to COP27 next year, participants are already planning how they will demonstrate progress, while the UN has commissioned an expert group to assess the integrity of net-zero commitments for companies and financial institutions. Commitments alone do not change weather patterns, of course. In the U.S. it will be crucial over the next few years that corporations and asset managers really act on their net-zero commitments, with the support of regulators. President Biden’s Climate Risk Executive Order has already directed several federal agencies to act on climate change. All financial regulators have been asked to study climate-related financial risks. The U.S. Securities and Exchange Commission has now proposed a rule on mandatory climate disclosures, but they are not yet as far-reaching as the U.K.’s requirements. The Department of Labor has announced a proposed rule allowing plan fiduciaries to consider ESG factors, while the Federal Reserve is assessing its ability to monitor climate impacts on the financial system. The U.S. is also looking at a potential climate action plan for procurement. What was missing from COP26? Despite clear progress, three important catalysts were missing from the conference: (i) a commitment to carbon pricing within developed markets; (ii) a robust framework for a carbon border adjustment tax; and (iii) meaningful assistance from developed to developing markets. We are optimistic that more progress will be made on these fronts. Will carbon markets play a more prominent role in the coming years? We have recently seen elevated interest in carbon markets. The “net” in net zero is about removing carbon from the atmosphere. In carbon markets, we must make sure the supply side has the right amount of quality offsets, while the demand side should require that actors use them responsibly. Voluntary carbon markets must grow in a way that truly impacts climate—unlike many current offset arrangements. In compliance carbon markets like the EU emissions trading scheme (ETS) carbon allowance prices are rising. However, the EU ETS was initially designed to reduce emissions, not achieve net zero; but success will require carbon allowances to operate alongside carbon removal offsets. In the U.S., carbon pricing and offsets are likely to grow in importance; however, offsets are very complicated, so almost every company and asset manager wants to better understand what is and what is not a legitimate offset.



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