''Enormous sums of capital” are required to help the world reach climate targets by decarbonising the energy sector, replacing industrial processes with clear alternatives, and making infrastructure energy efficient and resilient in the face of climate change.
However, a new report by asset management business Ninety One shows that sustainability-driven investment portfolios are often created in such a way that they avoid the problem rather than address it by “limiting an investment universe to only the cleanest industries”.
The report, titled “The rise of transition finance”, says that in 2022 the global value of environmental, social and corporate governance (ESG) assets is expected to rise to $41-trillion, which is nearly double the amount of 2016. But investors have largely focused on putting together carbon-neutral portfolios, which do little to solve global warming and achieve “real-world decarbonisation”.
“Portfolio purity does not work to solve the climate crisis. It worsens it,” says Nazmeera Moola, chief sustainability officer for Ninety One.
Similarly, according to the report, “oil and gas majors have divested high-polluting business units, or contracted polluting processes to third parties, removing the emissions — on paper at least — from their responsibility, without reducing the real-world effect of the industry”.
Transition finance differs from green finance in that the former implies a willingness to invest in companies that may now be high emitters, but have plans to decarbonise, while the latter refers to investment in low- or non-emitting assets, or climate solutions with measurable emissions avoidance, Moola explains.
More than half of the asset owners interviewed for the report said that transition finance was a major commercial opportunity, but just 35% said their organisation was likely to make transition-finance investments in the next 12 months.
The financial sector suffered from a lack of ability in assessing the merits of transition plans, Moola told Business Day. “This is a new field that is still being developed, transition standards are only about three years old, which means it can still be difficult to assess what constitutes a ‘good’ transition plan.”
It can also feel counterintuitive, she said, to put money towards a high emitter when the goal is to reduce overall emissions.
“It looks easier to invest in ‘green’ initiatives and while this is important it will not be enough to achieve decarbonisation.”
The gap between existing commitments and the investment required to make a successful transition to net-zero is even more pronounced in emerging markets, and is projected to reach about $95-trillion by 2060, an amount higher than global GDP.
The report found that only 16% of asset owners are invested in emerging market transition finance.
“Now is not the time for rich countries, their investors, asset owners and institutions to abandon the emerging markets. If an effective ‘buy developed, sell developing’ approach takes hold, emerging markets may be starved of investment capital at the very time they need it to finance their energy transitions,” said Moola.
A significantly lower proportion of asset owners from Southern Africa (37%), when compared with other regions covered in the survey (Asia Pacific, North America, Western Europe and the UK), say that fighting climate change is one of their fund’s strategic objectives.
Nevertheless, 22% of Southern Africa asset owners use transition finance in their funds, which is around the global average, and 48% say it is likely that they will invest in transition finance over the next 12 months.
As part of its own net-zero targets Ninety One has committed to have 50% of its financed emissions (using Scope 1, 2 and 3) covered by science-based Paris aligned transition plans by 2030.
Ninety One has been careful to set net-zero targets in a way that allows asset managers to work with the biggest emitters in their portfolios while they continue to engage with these companies on their transition plans, said Moola.
“We are very much against divestment from the biggest emitters and would rather support these businesses to achieve their transition plans, this is particularly important in a country like SA where high-emissions companies such as Sasol and Eskom play an integral role in the economy,” she said.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.