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Race to net zero: Decarbonising a private credit portfolio

Fidelity International

Fidelity International - Investment Team


With more capital channelling into private markets, ignoring their carbon footprint could leave investors vulnerable when balancing their decarbonisation ambitions and financial risk-adjusted returns to meet the goals of the Paris Agreement.

In some ways, it is more crucial for lenders to manage climate risk in private credit portfolios (see below chart), given the typically longer holding periods, liquidity constraints, and more complicated exit strategies. Furthermore, financial incentives - including regulatory requirements on private issuers to reduce emissions - are likely to increase. And as investors commit to portfolio decarbonisation goals, they will need to extend decarbonisation efforts to private assets.

Private credit’s decarbonisation cycle

Infographic depicting process of raising capital through private credit and the impact on climate risk on capital costs.

Source: Fidelity International, September 2023. For illustrative purposes only.

However, the task also can be more complex. Issuers in private credit are often smaller companies relative to their public market peers. The former has limited resources to improve environmental standards. Take measuring the operational carbon footprint, typically publicly available when investing in listed companies. The same data is often unavailable, incomplete, or inconsistent with international standards for private corporate issuers. This lack of data can make it more challenging for private issuers and lenders to gauge climate risks, integrate them into decision-making and measure progress.

How can investors address this data gap to make progress in their decarbonisation pathway? We discuss this and other challenges when reducing portfolio emissions in private credit, examining them in the context of specific asset classes, including collateralised loan obligations (CLOs), leveraged loans and direct lending.

Race to net zero: Decarbonising a private credit portfolio

It is just as crucial to decarbonise investments in private markets as it is in public markets to align financial goals with environmental responsibility. What are some of the practicalities to consider?

Download our short guide
Race to net zero: Decarbonising a private credit portfolio

Risk Warnings

  • Investments in private markets are highly illiquid and therefore unsuitable for investors who cannot hold their investments for a long time (at least 10 years).
  • The value of investments and the income from them may fall or rise, so investors may get back less than the amount invested.
  • Past performance is not a reliable indicator of future returns.
  • Investors should note that the views expressed may no longer be current and may have already been acted upon.
  • Private assets strategies do not offer any guarantee or protection with respect to return, capital preservation, stable net asset value or volatility. These strategies may invest in private or less liquid assets, which can be difficult to sell. As a result, it may be that investors are not able to redeem their investments when they want to.

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