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Show us the money on climate investing: asset owners

A significant chunk of asset owners are certain that climate investing means lower returns. After a year like 2022, it might be tough to convince them otherwise.
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As any journalist will tell you, if a headline poses a yes or no question, the answer is usually ‘no’. But for a new paper from global asset manager Ninety One – Are asset owners ready to finance a transition to net zero? – the answer is more complex: not quite a no, not quite a yes.

Transition finance – “a commercial investment approach that focuses on real-world impact to enable an investee’s climate-change strategy” – encompasses engagement with high emitters, investing in new innovations, and funding “vast infrastructure transformations”. But while some 60 per cent of the 300 asset owners Ninety One surveyed say fighting climate change is one of their fund’s strategic objectives, only 19 per cent say they use transition finance to any extent.

And 55 per cent of respondents say that their fund is not focused on any goal beyond the risk and return performance of their assets. That’s the boilerplate response from many pension and super funds, who are usually shy about saying they’ll invest  beyond that aforementioned goal for fear of political blowback (fears that have been realised in both the US and Australia).

But around 40 per cent of assets owners believe that climate-related investing means lower returns. That number is heightened in the APAC region, where around 47 per cent believe that transition finance is a major commercial opportunity for asset owners, compared to regions like North America (60 per cent) and the UK (56 per cent).

Similar anxieties have animated respondents to other surveys, including the 2022 edition of Schroder’s Institutional Investor Study, with 64 per cent of Australian respondents nominating “performance concerns” as one of the key challenges to sustainable investing –  roughly in line with the APAC region (61 per cent), but substantially higher than the rest of the world (53 per cent).

In the same survey, 16 per cent of global investors and 21 per cent of APAC investors found sustainable investing “very challenging” in 2022; that number is even higher in Australia, where 26 per cent of respondents said it was “very challenging” compared to a scant three per cent saying the same just last year, with Schroders laying the blame squarely on Your Future Your Super, along with “the scale and increased speed of change” in the sustainable investing landscape.

“For funds with positive climate outcomes as an explicit objective, short-termism is challenge,” the Ninety One report says. “With soaring energy costs in 2022, some of the world’s highest-emitting companies made large profits. Many climate-focused funds will not have owned these companies and would have missed out on associated returns.

“However, the most cited barrier globally by 60 per cent of respondents to transition finance is a lack of companies with credible and feasible transition plans, according to our survey. 55 per cent say that it is difficult for asset owners to measure or quantify an organisation’s progress in climate strategy or projects, though this is likely to improve with the continued enhancements in disclosure and data regulation.”

The high emission emerging markets are another area where asset owners are leery. Only 16 per cent of respondents are investing in emerging markets transition finance, and those that are “appear to have high conviction about the strategy.” While expanding transition finance in emerging markets is a moderate or high priority for 86 per cent of those who have adopted this approach, 53 per cent of respondents said their fund is concerned about the risk-return profiles available in the EM universe for transition-finance assets.

“Now is not the time for rich countries, their investors, asset owners, and institutions to abandon the emerging markets,” said Nazmeera Moola, chief sustainability officer at Ninety One (photo at top). “If an effective “buy developed, sell developing” takes hold, emerging markets may be starved of investment capital at the very time they need it 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.”




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