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New guidelines to streamline GHG advice

The Standards Board for Alternative Investments (SBAI) has published a new set of guidelines: the Principles for Greenhouse Gases (GHG)-Emission Accounting in Alternative Strategies, which expands on existing frameworks already developed by the Task Force on Climate-Related Financial Disclosures (TCFD) and the Partnership for Carbon Accounting Financials (PCAF).

SBAI is a London-based alliance of alternative investment managers and institutional investors that are “dedicated to advancing responsible practice, partnership, and knowledge across the alternative investment industry”.

"The SBAI develops a methodology that allows for the incorporation of derivatives and short positions in GHG-emission calculations and reporting."

The goal of this new framework is to “provide guidance for managers and investors looking to measure risk and impact associated with their hedge fund portfolios”. It was developed by the SBAI’s Responsible Investment Working Group – which is comprised of leading alternative investment managers and institutional investors from the SBAI’s global network of Signatories and Investor Chapter members. The group represents more than $8 trillion in assets under management.

“In this first iteration of guidance, the SBAI develops a methodology that allows for the incorporation of derivatives and short positions in GHG-emission calculations and reporting in relation to listed and unlisted equity, corporate bonds and business loans, project finance, commercial real estate, mortgages, motor vehicle loans, and sovereign debt,” said the organisation’s press release.

The framework outlines the case for the inclusion of derivatives and short positions from both the perspective of sustainability outcomes and the impact on market price formation – as well as measuring and assessing total GHG-emission risk exposure.

The issue of a lack of clarity on what is necessary around GHG emissions is widespread as there is also a severe lack of data around GHG to help guide fund operators. The UN Principles for Responsible Investment (UNPRI) warned off issues in this sphere and said that for large companies (listed or debt issuers) in major capital markets such [multi-asset portfolio climate] data sets are now more mature - for certain lines - but added that “in other asset classes, such as private equity and sovereign credit, data sets are often not available, incomplete or there continues to be a lack of established methodology to calculate greenhouse gas (GHG) emissions.”

They added that “commonly used in multi-asset portfolios, financial instruments (e.g., derivatives) and strategies (e.g., long/short) raise a different set of issues around the calculation of portfolio GHG emissions.”

It's factors such as these that partly drive the need for more frameworks in place.

What do the principles help with?

As part of the principles, the SBAI also provided metrics that investors can use to “assess their (potential for) impact on sustainability outcomes, including through their ability to vote, or to provide new cash funding in primary markets”.

“Alternative investment managers don't have the same resources now that they had in the past, as it is a more costly environment to operate in."

Previously, the SBAI has been outspoken on the topic of ‘responsible investment’, releasing other materials on climate-related issues and speaking about the regulatory burden on the investment community, especially for smaller companies.

In a 2023 interview for Fund Operator, Brian Digney, Research and Content Director at the SBAI, discussed how investment operations professionals could balance resources with regulatory compliance. “Alternative investment managers don't have the same resources now that they had in the past, as it is a more costly environment to operate in,” he said, adding that the regulatory element was potentially the largest operational risk that alternative investment managers were facing.

“Regulatory expectations keep expanding and growing. We have seen a number of key initiatives in the US such as the private funds, outsourcing, and cyber security proposals emerge,” he said. “The Form PF proposal was recently adopted, not long after the change to marketing rules. In Europe, there is an additional focus on climate risk and sustainable investing, which we know the industry has struggled with.”

A number of industry organisations backed the ideas highlighted in the principles, including the UNPRI. “The PRI welcomes the SBAI’s efforts to provide guidance on GHG-emissions accounting when employing strategies other than investing in long-only cash equities,” said Toby Belsom, Director of Guidance at the PRI.

“When investors deploy these strategies and invest in alternative vehicles, they should do so whilst being fully transparent when disclosing GHG-emissions related to portfolios and investees. This includes being clear about which metrics and measures they use to record progress on reducing GHG-emissions, how they engage, and how they work towards sustainability outcomes,” he said.

Others highlighted the principles for the ways they could be used to decrease the amount of risks that fund operators were exposed to.

“The SBAI's Principles allow for more transparent GHG-emission risk accounting at portfolio level,” said Paula Volent, SBAI Trustee, VP & CIO, Rockefeller University.

“It's not sufficient that solutions meet the sustainable investing criteria the client is looking for, the solution should also align and comply with regulatory requirements.”

The SBAI said that its Responsible Investment Working Group will continue to explore methodologies for carbon accounting and potential cases for inclusion in other asset classes – including commodities and insurance-linked funds. Updates to this framework would continue to be published, it also said.

The principles will impact fund operations staff as hopefully they will provide more clarity and support in an area dogged by practioners being unsure where to focus. Last year, Natalia Back, Associate Director, ESG Regulations, Private Markets, Manulife Investment Management, discussed the issues of voluntary and compulsory regimes for helping achieve ESG goals. “In the past, we would create a product for an investment strategy that applied our in-house ESG integration process, but in the current environment, we need to advance the strategy and also meet regulatory-related requirements,” she said. “It's not sufficient that solutions meet the sustainable investing criteria the client is looking for, the solution should also align and comply with new regulatory requirements across multiple jurisdictions.”

With these frameworks in place, it should be easier for practitioners to operate, especially as ESG and GHG regulations continue to change and develop.

 

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