The origins and objectives of mandatory climate reporting have always been rooted in risk management—specifically managing the climate-related financial risks outlined by the Task Force on Climate-related Financial Disclosures (TCFD). These risks include transition risks, such as policy, legal, technological, and market risks, which are material to asset owners and their long-term financial outcomes.
For asset owners, who allocate capital across a diverse array of fund managers, the ability to manage these risks hinges on access to high-quality emissions data.
With the TCFD now absorbed into the new IFRS-S2 reporting standards, demonstrating effective risk management practices is becoming integral to financial reporting. This means that asset owners must now show that they are actively managing climate-related financial risks, just as they would other material financial risks. To do this effectively, they need precise emissions data across their entire portfolio, especially in private markets where public disclosures are limited.
However, the challenge lies in obtaining that data. Public markets may offer some disclosure, but in private markets, asset owners often face significant data gaps. Relying on sector-based estimates or proxy data is not sufficient to manage material risks like transition risks. Asset owners need specific, company-level emissions data to ensure they are addressing potential exposure across their portfolios.
So, how can asset owners get the data they need to manage these risks?
This is where the critical role of fund managers comes into play. Asset owners depend on fund managers to manage their investments and to provide a clear understanding of the emissions risks associated with those holdings. Fund managers, due to their close relationships with portfolio companies, are ideally positioned to collect the necessary emissions data directly from those companies. When fund managers request this data, the response rate significantly increases, providing asset owners with the information they need to make informed decisions.
For asset owners, collaborating with fund managers is the first step in building a comprehensive approach to managing climate-related financial risks. These risks can include:
Policy risk: Governments implementing regulations that increase costs for carbon-intensive sectors, which asset owners need to monitor and mitigate.
Technology risk: Rapid advances in clean technology could devalue carbon-intensive assets, making it essential for asset owners to adjust their holdings accordingly.
Legal risk: Increased scrutiny and potential litigation related to greenwashing or failure to manage climate risks present material risks to asset owners.
Market risk: Shifting consumer demand for sustainable products may diminish the value of investments in companies that are slow to decarbonise.
Asset owners need fund managers to take the lead in gathering detailed emissions data from portfolio companies. This flow of accurate data is vital to helping asset owners identify where they are most exposed to transition risks, enabling them to build robust, data-driven transition plans.
With the inclusion of climate-related risk management in financial reporting through IFRS-S2, asset owners will need to demonstrate how they are managing these material risks. This is why working closely with fund managers to secure specific emissions data is essential.
Technology’s role in empowering fund managers to support asset owners
The relationship between asset owners and fund managers is central to managing climate-related risks in private markets. The focus of our work at Pathzero is designed to enable fund managers to gather and share the emissions data asset owners need to navigate the transition to a low-carbon economy.
This enables real, company-reported emissions data flows seamlessly from portfolio companies to fund managers, and ultimately to asset owners. This means that asset owners can finally gain visibility into their entire carbon footprint across private markets, allowing them to assess their exposure to transition risks accurately. By empowering fund managers with the tools to gather and analyse this data, it ensures that asset owners have the insights they need to make informed investment decisions, optimise portfolios, and stay aligned with their long-term goals.
A collaborative approach to managing climate-related risks
As mandatory climate reporting evolves under the IFRS-S2 standards, asset owners face growing pressure to manage material risks associated with the transition to a low-carbon economy. The key to doing this effectively lies in the collaboration between asset owners and fund managers. Fund managers, through their relationships with portfolio companies, hold the key to gathering the detailed emissions data that asset owners need to manage these risks.
By working closely with fund managers, asset owners can gain the data-driven insights they need to align their portfolios with both financial and sustainability goals. Together, asset owners and fund managers can ensure better financial outcomes as the world transitions to a more sustainable future.
Pathzero was named the most innovative company in Australia at the AFR BOSS Most Innovative Company Awards in October. It also won the banking and financial services, and small company of the year categories.
