If asset managers focus solely on picking and choosing investments that make their portfolio appear green, rather than advocate for real-world carbon reduction, they will fail to effect the kind of change needed to tackle the climate crisis, says Henrik du Toit, founder of Ninety One.
Du Toit called for an end to “buzzwords, greenwashing, marketing gimmicks and gaming the system” and said the focus must be upon long-term transition plans not near-term reductions.
He said: “The challenge is that many investors are focused merely on a reduction of their own reported carbon emissions or on reducing portfolio carbon. By myopically focused on ‘portfolio purity’, they aren’t effecting the kind of change needed to tackle the climate crisis. All they are doing is creating discrete so-called clean portfolios.”
Du Toit warned that in doing so, they risk leaving the problem of heavy emitters to others, perhaps even to bad owners.
He explained: “By way of example, in a typical global equity portfolio, a reduction of 50% exposure in the BRICS plus Indonesia will lead to a 3% reduction in reported portfolio carbon intensity. The weight of those countries in the index is just 8%, another reason divestment may be more attractive than engagement.
“This gives institutional investors an incentive to divest and avoid these markets. Our experience in emerging markets tells us a very different approach is required.”
Du Toit described divestment as irresponsible and said it demonstrated a lack of either understanding or transparency regarding the climate crisis.
According to du Toit: “Divestment does not deal with the climate crisis, it simply exacerbates it. While emerging markets are today responsible for more than two thirds of annual global emissions, OECD member countries are responsible for three fifths of cumulative historic emissions. Now is not the time for rich countries, their investors, asset owners and institutions to abandon the rest.
“If an effective ‘buy developed, sell developing’ takes hold, emerging markets may be starved of investment capital at the very time they need an extra $2.5 trillion a year to finance their energy transitions.”
Du Toit said asset owners must offer investors clear transition plans, which requires “patient pragmatism” rather than instant purity, or a focus on transition finance instead of on net zero finance. Consideration should also be given to the context in which each country operates, its potential to contribute to the world’s collective net-zero ambition and its specific transition pathway.
Asset managers and owners should commit capital to transition finance, both in dedicated allocations and the way they measure and monitor progress against climate goals in core portfolios, says du Toit.
“Asset managers must develop suitable vehicles with the integrity and framework to provide comfort that commitments to transition are not greenwashing. It is imperative to create financial instruments that help capital allocators align portfolios with a real-world, inclusive decarbonization e.g. instruments that channel capital to companies and projects that move the global economy closer to carbon neutrality and that enable poorer nations the opportunity to participate in the net-zero transition.”
Du Toit believes electricity should be a key focus, with many emerging markets including India, South Africa and Indonesia still heavily reliant upon coal for electricity production. According to Du Toit, the private sector must drive the early momentum of the transition and provide green finance at scale.
[Main image: matthew-smith-Rfflri94rs8-unsplash]
