In Focus: Sustainable investing  

Can transition finance help the shift to net zero?

Can transition finance help the shift to net zero?
Photo: Pixabay via Pexels

Asset owners and investors are becoming more climate-change conscious in their portfolios, but most are not exploring how transition finance can help achieve these goals, according to Ninety One. 

The asset manager's yearly Planetary Pulse Report found that while 60 of asset owners say fighting climate change is one of their fund’s strategic objectives, and 51 per cent say their fund has emissions-reduction targets, only 19 per cent are using transition finance. 

According to Hendrik du Toit, founder and chief executive of Ninety One, this is a missed opportunity for both making a return and making a difference when it comes to meeting environmental, social and governance aims.

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He said: “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. We must mobilise transition finance alongside green investment."

In a nutshell, transition finance is a commercial investment approach that focuses on real-world impact to enable an investee’s climate-change strategy.

It intends to help reduce carbon while achieving profitable returns, and can involve some or all of the following methods:

  • 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.

Du Toit added: "By allocating finance to transition, asset owners can profitably participate in the world’s adaptation 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.”

ESG strategies on the rise

The Planetary Pulse study surveyed 300 senior professionals at asset-owner institutions globally, including pension funds, insurers, endowments, foundations, central banks and sovereign wealth funds.

The report also showed how the investment world has expanded ESG-branded investment strategies, funds and services. In 2022, global ESG assets are expected to rise to $41trn, which is nearly twice the amount of 2016 ($22.8trn).

By 2025, ESG assets are forecast to pass $50trn and comprise one-third of total global AUM.

However, many assets which are branded as ESG do not in fact encourage change from brown to green in the real economy. In 2021, more CO2 was released than any other year to date, with coal the main factor behind the rise.

Nazmeera Moola, chief sustainability officer for Ninety One: “ESG-branded assets are often designed to show small carbon footprints, but this sometimes means they are not addressing 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. Portfolio purity does not work to solve the climate crisis. It exacerbates the crisis.”