ESG News
INVESTORS NEED TO ADDRESS THE TRANSITION CHALLENGE
Decarbonising portfolios often fails to address real world cli- mate problems, with asset owners possibly being part of the problem, finds Andrew Holt.
The investment world has expanded ESG investment strate- gies at a rapid rate, with such assets globally expected to rise to a massive $41trn (£36trn) this year, almost twice the $22.8trn (£20trn) recorded in 2016 and surpassing $50trn (£44.8trn) by 2025, and comprising one-third of global assets under management. Yet there is an accusation that many assets branded as ESG do not encourage change from brown to green in the real economy. A case in point being that in 2021, more CO₂ was released than any other year to date, with coal the main factor behind the rise.
The criticism is that ESG assets are often designed to have lower car- bon footprints, but this sometimes means they are not addressing real-world decarbonisation, with asset owners being at the heart of this dilemma. “Portfolios are created that avoid the problem [of decarbonisation], instead of solving it – often, by sim- ply limiting an investment uni- verse to only the cleanest indus- tries. Portfolio purity does not work to solve the climate crisis. It exacerbates the crisis,” said Naz- meera Moola, chief sustainability officer at investment manager Ninety One, which has studied the topic.
Confronting transition These are strong words. But they are shared by leading asset owners in the need to confront transition finance in a better, more constructive way. “We know that the amount of money being deployed for transition finance is about 10% to 20% of what it needs to be if we’re going to achieve the Paris Agree- ment targets,” said Faith Ward, chief responsible investment officer at Brunel Pension Partnership. It does raise a big question: why aren’t asset owners more con- structively invested in transition finance? The study asserts that one of the most important is it requires them to make a shift in their approach or culture. “Portfolio managers at these asset owners are not driven by top-down sustainability principles,” it notes.
30 | portfolio institutional | November 2022 | Issue 118
This is quite an assertion, as the interviews portfolio institutional undertakes frequently include a real commitment to climate and transition finance from top asset owners.
Investor demands But sometimes, what is holding asset owners back on the tran- sition journey are the companies in which they wish to invest in may not have the appropriate ESG framework, said Alison Loat, managing director of sustainable investing and innova- tion at OPTrust, a CA$25bn (£16.3bn) Canadian pension plan. “There is an aspiration to invest more in transition finance, and we have to ensure funds and companies that we invest in have the governance procedures in place to adhere to what we require as an institutional investor,” she said. So given that this is a complex problem, how can asset owners move to a more fully-fledged transition? “I would probably start with the policy framework. What do I actually need in the real economy? What are the spe- cific outcomes we want?” Ward said. And she added there is a broader sector challenge. “We need some certainty. One of the common questions is: what is the plan for this sector? One of the examples we keep going back to – and which we want more of – is the announcements that have been made around the internal com- bustion engine and the shift to electric vehicles.”
Many markets
In the same way, a framework for asset owners and investors as a whole is needed, Ward said. “That has set some clear time- lines that policymakers, regulators, car manufacturers and investors can all get behind, because we know there are set deadlines within different markets for different parts of this, and a clear transition plan for the shift to electric vehicles. We need similar types of long-term, well-thought-through strate- gies for each of our sectors.”
And the study revealed that 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. On this, Ward added: “There is an opening for blended finance and more collaboration between development banks and investors. “Everybody needs to come together, recognising that there will be different solutions in different markets as well,” she said.
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