A new report by global investment manager Ninety One has found that 60% of asset owners say fighting climate change is one of their fund’s strategic objectives and 51% say their fund has emissions-reduction targets but more should be focussed on transition finance, argues the asset manager
Its annual Planetary Pulse Report ‘The rise of transition finance‘ showed 48% of asset owners with climate-related targets had them set at portfolio level, while 46% set targets for specific mandates, portfolios or funds. Less than a third (28%) set their targets at asset-class level.
However, Ninety One said that while most asset owners are taking action in response to climate-related risks and opportunities, the findings are less positive when looking for real-world impact. Only 19% say they use transition finance, an investment approach that focuses on reducing carbon while achieving profitable returns, while just 16% say their fund invests in emerging markets where emissions and populations are growing the fastest.
For the majority (87%), no more than half of their organisation’s assets under management (AUM) falls under climate-related strategies and 46% have no more than a quarter in these portfolios. Additionally, only 11% have from half to three quarters of their AUM in climate-related strategies and less than 1% have more than three quarters.
Ninety One said 55% of asset owners surveyed say their fund is not focused on any goal beyond the risk and return performance of their assets, with 40% of asset owners believing that climate-related investing leads to lower returns.
The firm said short-termism also remains a challenge for funds with positive climate outcomes as an explicit objective, with many climate-focused funds missing out on the large profits recently made by highest energy emitting companies who benefitted from soaring energy prices. However, the biggest challenge cited by respondents (60%) to transition finance is a lack of companies with credible and feasible transition plans and 55% say it is difficult for asset owners to measure or quantify an organisation’s progress in climate strategy or products.
Emerging markets also present a challenge and opportunity, the report showed. While expanding transition finance in emerging markets is a moderate or high priority for 86% of those who have adopted the approach, 53% of respondents say their fund is concerned about the risk-return profiles available in the universe of emerging market transition finance assets.
Nazmeera Moola, chief sustainability officer at Ninety One, said: “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’ takes hold, emerging markets may be starved of investment capital at the very time they need 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 achieve net-zero targets are letting go of some of the most powerful levers in the fight against climate change, as well as return 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.”
More than half of asset owners 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 of 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 and promising attractive risk-adjusted returns, will reap benefits for investors as well as the planet.”
du Toit said investors must mobilise transition finance alongside green investment and by allocating finance to transition, asset owners can profitably participate in the world’s adaptation to net zero and help mitigate climate change.
He added: “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.”
