Planetary Pulse: Are asset owners ready to finance a transition to net zero?
18 Oct, 2022

Planetary Pulse: Are asset owners ready to finance a transition to net zero?

Hendrik du Toit, Founder & Chief Executive of Ninety One and Nazmeera Moola, Chief Sustainability Officer, Ninety One

Emerging market transition finance will be critical to successful climate action. Despite this, only 16% of asset owners are invested in emerging market transition finance, an investment approach that focuses on real-world impact, and can involve investing in some of the most challenging industries to decarbonise, such as steel, cement and chemicals.¹

The gap between existing commitments and the investment required for emerging markets to make a successful transition to net zero by 2060 is estimated to be almost US$95 trillion, an amount higher than global GDP. However, despite half of asset owners believing that transition finance is a major commercial opportunity, just 35% say that their organisation is likely to make transition-finance investments in the next 12 months.

These are some of the findings of Ninety One’s Planetary Pulse Report, The rise of transition finance, which was published today. The study surveyed 300 senior professionals at asset owner institutions in the UK, Southern Africa (South Africa, Botswana and Namibia), Asia Pacific (Hong Kong, Singapore, and Australia) Western Europe (Germany, Netherlands, Denmark, and Switzerland) and North America (Canada and the United States), and included pension funds, insurers, endowments, foundations, central banks and sovereign wealth funds. The report explores the rise of transition finance, what it means for asset owners and its role in the fight against climate change.

Somewhat more encouraging is the fact that the survey found that 60% of the respondents say that fighting climate change is one of their fund’s strategic objectives, with 51% stating that their fund has emissions reduction targets in place. It shows that most are doing something in response to climate-related risks and opportunities. However, with only 19% using transition finance to any extent, and fewer still investing in transition-finance assets in emerging markets, the regions where emissions and populations are growing the fastest, real-world impact is limited.

Many ‘green’ strategies avoid the problem

Billions of dollars have flowed into ESG-branded investments, with global ESG assets expected to rise to US$41 trillion this year. But investors have largely focused on constructing carbon-neutral portfolios, which have done little to solve global warming and move us closer to real-world decarbonisation. Portfolios are created that avoid the problem, instead of solving it — often, by simply limiting an investment universe to only the cleanest industries.

Nazmeera Moola, Chief Sustainability Officer, Ninety One: “Portfolio purity does not work to solve the climate crisis. It, it exacerbates it. 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. We must focus on long-term transition plans consistent with net zero by 2050 for companies and countries, not near-term portfolio emission reductions.

“Asset owners that take a divestment approach to net-zero targets are letting go of some of the most powerful levers in the fight against climate change, as well as opportunities. They have the ability to use their capital and influence to catalyse and enable transitions to low-carbon alternatives and move closer to the Paris Agreement targets — a path that can often overlap with the path to long-term growth and responsible risk management.”

Why are asset owners not more invested in transition finance?

More than half of asset owners (55%) say their fund is not focused on any goal beyond the risk and return performance of their assets. Furthermore, there is the commonly held view that climate-related investing leads to lower returns, which 40% of asset owners in the survey believe.

However, the most cited barrier by 60% of respondents to transition finance is a lack of companies with credible and feasible transition plans, according to our survey. 55% also stated that it is difficult for asset owners in measuring and quantifying an organisation’s progress in its climate strategy or products, though this is likely to improve with the continued enhancements in disclosure and data regulation.

Where do Southern African asset owners stand on transition finance?

Understandably, Southern African asset owners have a distinct perspective on climate-related investing and transition finance, stating that it is not suitable or fair to put climate concerns ahead of critical social and economic issues.

This bears out in the survey results, where compared to other regions, significantly lower proportions of Southern African asset owners say that fighting climate change is one of their fund’s strategic objectives (37%), and that financial institutions have a responsibility to provide investment capital to fund the decarbonisation of high emitters (37%). The same pattern holds in relation to transition finance being viewed as major commercial opportunity for asset owners, and of its growth prospects, both of which are much lower than other regions.

Nonetheless, 22% of Southern African asset owners use transition finance in their funds, and 48% say it is likely that they will invest in transition finance over the next 12 months – the latter was the highest result of all regions. What differentiates these investments from those of developed market asset owners is that they may often be designed to make a real impact on more than just the climate, with goals related to working conditions, community upliftment, and infrastructure development.

The climate won’t wait

More than half of asset owners (56%) believe that without greater investment in transition-finance assets, the world will not be able to meet the Paris Agreement climate-change goals.

Hendrik du Toit, Founder and CEO, Ninety One: “To meet international, national and organisational climate targets, we need to decarbonise energy, replace myriad industrial processes with clean alternatives, improve energy efficiency, and transform infrastructure. Transition finance is the legitimate and effective alternative that enables the move from brown to green while meeting standard risk and return objectives. Financing even heavy emitters, as long as they are on a verifiable path to net zero, will reap benefits for investors as well as the planet. We must mobilise transition finance alongside green investment. By allocating finance to transition, asset owners can profitably participate in the world’s adaption to net zero and help mitigate climate change. Transition finance is not in conflict with the fiduciary duty of asset owners. It is an attractive return opportunity which at the macro level mitigates the biggest systemic risk of our time.”

¹ Transition finance is a commercial investment approach that focuses on real-world impact to enable an investee’s climate-change strategy, and can involve:

Investing in some of the most challenging industries so that high emitters receive the capital and influence they need to transform their operations
Investing in new innovations and projects that might not be profitable initially
Funding vast infrastructure transformations
Increasing exposure to emerging markets, where emissions continue to grow the fastest and the need for all forms of support is greatest

Download Ninety One’s Planetary Pulse Report

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