Asset owners representing more than $11-trillion are warning private equity firms and other alternative managers handling unlisted assets to make sure they don’t fall behind the rest of the investment industry in reducing financed emissions.

The United Nations-convened Net-Zero Asset Owner Alliance is urging managers of private assets to “raise their level of climate ambition,” according to a report published Thursday by the group. The alliance counts Aviva, California Public Employees’ Retirement System and Swiss Re among its 80 members.

The asset owners echoed a concern that’s been voiced by some of the heavyweights of global finance, including BlackRock CEO Larry Fink, on the disconnect between public and private markets. With publicly traded companies subject to more scrutiny, the risk is that carbon-intensive assets move into private hands, which would represent “the largest capital-market arbitrage in our lifetimes,” Fink said last November at the COP26 climate summit in Scotland.

A year later, with the COP27 summit just having ended in Egypt, the alliance of asset owners underlined that same sentiment. It’s a scenario that represents “a risk that threatens the Alliance members’ portfolio-wide decarbonization targets,” NZAOA said.

“Since our commitment to decarbonised portfolios covers all our assets, a reshuffling of businesses and projects from one asset class in our portfolio to another isn’t achieving our goals,” said Patrick Peura, who co-authored the paper for the asset owner alliance and is also an engagement manager at Allianz. “What is more important, from a perspective of decarbonization, isn’t where the company sits in the different asset classes of our portfolio, but how it performs on decarbonisation.”

Not only have public companies faced greater scrutiny around their carbon emissions from investors and activists in recent years, but they’re also subject to tougher regulators targeting climate-related disclosures.

In a separate report earlier this year, the investor group said an overemphasis on public markets “leaves investors prone to squeezing the balloon,” whereby climate risks are shifted to another part of an investor’s portfolio or to another investor altogether. When public companies sell high-emitting assets to smaller public or private companies that “face less operational scrutiny and investor pressure on climate issues,” the “transfer in ownership potentially worsens real-world emission outcomes.”

Fink, for instance, has characterized the transfer of hydrocarbon assets to private investors as “window dressing” and “greenwashing.”

But private investors can wield great clout because they can “directly influence the topics that a company’s management addresses,” such as cutting emissions, NZAOA said. Meanwhile, the dynamics of the private debt markets give credit managers “a unique chance” to influence smaller companies that also are important in the net-zero transition.For asset managers that invest on behalf of these asset owners in private markets, hiding in the shadows will no longer be an option, Peura said.

“By signaling what we need from asset managers in private markets on climate change, it becomes clear that those not taking expedient steps to integrate climate across their investment functions are risking not meeting our needs as potential clients,” he said.