Asset owners are wrestling with how to balance pressure to decarbonise their own investment portfolios in the short-term against the benefits of investing in longer-term decarbonisation of polluting industries.
The trade-offs for asset owners between decarbonising their portfolios and maximising real world emissions reductions are thrown into relief by the latest annual report from investment manager Ninety One.
The 2023 Planetary Pulse report highlights a growing belief among some in the industry that transition finance – which includes investment aimed at reducing emissions in the most polluting industries – should play a larger role in climate-related investment as part of efforts to reduce carbon emissions, even if it may not help decarbonise their portfolios in the short term. It’s also a role that is coming under scrutiny at the COP28 climate change conference in Dubai, as participants strive to open up as many opportunities as possible to reach net zero targets that are in danger of being missed.
Nazmeera Moola, Ninety One’s chief sustainability officer, said the survey suggested transition finance was “clearly recognised for its real-world credentials over and above meeting portfolio decarbonisation targets”.
Some 300 asset owners and consultants in eight sub-industries were surveyed in Europe (125 organisations), the US and Canada (80), Australia, Hong Kong and Singapore (60), and southern Africa (35). Ninety One – formerly Investec Asset Management – commissioned FT Longtitude to carry out the research.
The survey shows that the number of asset owners reportedly devoting 25-50% of their asset under management to portfolios with climate-related objectives is on the rise, up to 48% this year compared to 40% in the 2022 report. Around half of asset owners said they had an emissions target in place for their fund.
However, there was awareness that decarbonising a portfolio was not necessarily the best way for investors to contribute to climate change measures. Most asset owners that used integration of climate-related factors as an investment tool (55%) said this contributed more to portfolio decarbonisation than to cutting global emissions. Conversely, 52% said transition finance lowered real-world emissions, while only 34% said it made a significant contribution to portfolio decarbonisation.
Although a majority of asset owners (57%) said that using an established climate-related target-setting framework had a real impact on emissions levels, around a third thought the use of established frameworks prevented their investments from making a real-world impact. Just over 40% said discretion over which climate targets could be used by asset owners was too broad and needed to be more limited, and a similar number thought the list of underlying metrics used should also be narrowed down.
Ninety One points to what it calls a disconnect between the acknowledgment by asset owners that investing in transition finance reaped benefits for the planet and what some were actually doing in their current strategies.
Around half of asset owners surveyed said financial institutions had a responsibility to help fund decarbonisation of high emitters, but only 40% said their fund owned or managed transition finance investments. Just over a third (35%) said they planned to make transition finance investments within the next year.
“Our research shows there is a disconnect between decarbonisation intentions and outcomes, and that investors need to be able to capture the full picture of their portfolio’s emissions to measure climate impact,” Moola said.
Apparently, the advice asset owners are getting from their consultants is to do more in this regard. The survey reported that 60% of consultants responding to the survey advised clients to make allocations to transition finance, even where it could increase the carbon intensity in the portfolio.
There was also recognition that investing via transition finance in emerging markets need not only be about boosting green credentials. Of those surveyed, 51% said it presented a major commercial opportunity for asset owners, besides helping to reduce emissions. But a similar number also said they were concerned about the risk/return profile of these assets. That reflects the need for more work to be done to improve perceptions of risk among private investors with regard to emerging markets, something which development finance institutions are seeking to address through the use of blended finance and other mechanisms.