For private-capital investors, low emissions disclosures, regional disparities due to differences in regulation and skewed sectoral reporting make for a difficult landscape in which to assess the emissions and climate-related risks of their portfolios. With private investments set to play a major role in the transition toward net-zero, in this blog post we assess the state of emissions reporting in private markets relative to public markets and identify the reporting disparities across asset classes, regions and sectors.
Private markets staying private about emissions
Total Scope 1 and 2 emissions reporting in the private-capital markets was low when compared to the MSCI ACWI Investible Market Index (IMI), which reached 58.0% as of January 2024.[1] Within the MSCI Private Capital Solutions’ data of over 58,000 portfolio companies in private-capital funds, only 1,312[2] had Scope 1 and 2 emissions reporting[3] — a disclosure rate of just 2.2% as of 2Q 2023. The reporting rate dropped to 1.7% after applying a number of filters and mapping the emissions data to the Burgiss Manager Universe (BMU).[4] Those companies with reported emissions accounted for 4.5% of the net asset value (NAV) and 9.8% of the estimated financed emissions[5] across private equity and private debt in the BMU, demonstrating some disclosure skew toward high-NAV, high-emitting companies.
Private equity and private debt showed similar rates of emissions disclosures at 4.5% and 4.3% of NAV, respectively. Yet, private debt’s emissions disclosures were skewed much more heavily toward high-emitting companies. Nearly a quarter of private debt’s calculated financed emissions were based on reported figures, compared to only 6% in private equity. As illustrated in the exhibit below, within private debt nearly 44% of distressed debt’s calculated financed emissions were based on reported data, concentrated in only 8.6% of NAV, demonstrating further disclosure skew toward high-emitting companies.
Reported emissions are not created equal
Disclosure was highest in utilities
The percentage of reported emissions was highest in carbon-intensive sectors, such as utilities and energy.[6] Over half of the private-capital financed emissions in utilities came from companies with reported emissions, concentrated in 25% of NAV.
Carbon-intensive sectors dominated reported emissions
While transparency is important overall, there may be further calls for carbon-intensive companies to disclose their emissions from investors, as they look to align with net-zero or assess their exposure to transition risk. Globally, carbon-pricing schemes have been on the rise and may result in higher costs and squeezed profitability margins for high-emitting companies. Emissions disclosures may increasingly be needed in private-capital portfolios to precisely assess climate risk as economies transition to net zero.
Emissions reporting was lowest in North America
Only 3% of the North American private-assets market by NAV had reported emissions, compared to 8.2% and 5.8% in Europe and Asia, respectively. The disclosure gap among regions nearly doubled when considering the share of financed emissions that was based on reported figures: 6.3% in North America, compared to 16.0% and 12.2% in Europe and Asia, respectively, as shown in the exhibit below.
Emissions reporting by region
In recent years, there have been new developments in climate regulations that may impact reporting in the U.S. and globally. For example, in March 2022, the Securities and Exchange Commission (SEC) proposed new requirements for U.S.-listed companies to disclose information on climate-related risks.[7] If adopted, the proposal may require U.S.-listed GPs to report their portfolios’ emissions footprint, including private companies. Our research estimated that ~11% of global privately held capital may be affected by this proposed rule. In addition, investor-led initiatives such as the ESG Integrated Disclosure Project (IDP)[8] have emerged to encourage more consistent private-market disclosures and facilitate material comparison across asset classes.
Guiding engagement pathways
Although emissions reporting in private capital was low, companies in carbon-intensive sectors have led the way. Further increases in emissions disclosures may help investors looking to channel private capital toward companies with innovative climate solutions in the traditionally high-emitting sectors. Disclosing private assets’ carbon footprint may be critical in supporting more-informed risk management and engagement decisions, especially as private investments become more integral to the net-zero transition.