Since the world committed to a 2050 net-zero target two years ago, governments and industry players alike have been innovating on green solutions to get there. But on the road to meeting this target, many have yet to consider transition finance.

Deputy Prime Minister Lawrence Wong was one of those who had warned that no amount of new green projects would get the world to net zero. “We need to resolve everything that’s existing today, especially in Asia, where coal plants generate 60% of electricity,” Wong said at the Sustainable and Green Finance Institute (SGFIN) opening in April.

Global asset management firm Ninety One, which has US$159.3 billion ($214 billion) assets under management (AUM) as of March 31, reached this understanding in 2015. The firm says over half of its portfolio deployed in emerging markets is engaged in high-emission activities.

Speaking to The Edge Singapore, Ninety One’s chief sustainability officer Nazmeera Moola says the team quickly understood the significant risk climate change presented to the planet and people and investment portfolios over the medium term.

Ninety One had two options: Divest and exclude these high-emitters or further align themselves with the Paris climate agreement of reducing emissions. Moola says that only 24 of the 1,200 holding companies Ninety One is involved in are considered high-emitting companies; opting for divestment would have been the easy way to hit decarbonisation targets. But this would have “absolutely no benefits in the real world”.

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Instead of divesting — which Moola says is “counterproductive” — the team joined the Net Zero Asset Managers initiative, an international group committed to supporting the goal of net-zero greenhouse gas emissions by 2050 or sooner. The firm then developed two parallel climate strategies for its portfolio's 24 top polluting companies.

The first is an equity strategy termed global environment, where the team provides capital to solution providers or companies developing new technologies for climate solutions. The second is a debt financing strategy, where Ninety One looks to provide financing to mainly middle-income, emerging market countries.

Difficulties of transition finance

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The debt financing strategy sets out to do three things: Finance new infrastructure, such as infrastructure required to build renewable energy; finance new technologies in areas like electric vehicles; and finally, invest in decarbonising high-emitting companies currently.

Moola describes Ninety One’s involvement with these firms as “pragmatic”. “[We’re] saying, you know, we think you should have a transition strategy that needs to start with robust targets, and these are some examples of good targets and what the disclosure looks like.”

These big emitters are typically from the motor vehicle manufacturing, mining, and energy sectors and are largely susceptible to global economic headwinds. This makes them unable to commit to overly ambitious targets, says Moola, who explains that their strategy is not to enforce, but rather to work in parallel. “We’re not saying you have to do it this way’ we’re saying these are some examples of where we’ve seen this done well. And once you have good targets, it's about fleshing out the plan.”

Ninety One published its annual report, Planetary Pulse, on new primary research into transition finance last October as part of its climate efforts. Based on a survey of 300 senior professionals at asset-owner institutions and advisors worldwide, the report found that 60% of respondents said the most commonly-cited barrier to transition finance is a need for companies with credible and feasible transition plans. The second, cited by 55% of respondents, was the difficulty asset owners face in measuring and quantifying an organisation’s progress in its climate strategy or related projects.

Moola and her team counter this with a collaborative approach, using a transition plan assessment framework developed internally, which assesses the transition plans of companies. “We look at their targets and evaluate if they’re allocating capital. Do they understand the financial implications of it? How are they looking at timing the implementation?” she says. “Is it based on current technology? If a company has a 2030 target, and achieving the targets is largely premised on developing new technology, I start to get very worried.”

She cites an example of engaging with a company that had recently set out good climate targets but explained that the roadmap to achieving those targets needed to be articulated better. “We need to know how you’re going to do it,” she adds. “If you tell us you’re going to change much of your power into renewables and some of your feedstock from coal to gas, when and what does that look like? What are the timelines we should be monitoring?”

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For Ninety One, it is also about getting technical. Some high-emitting companies have less direct emissions than simply emitting carbon dioxide from burning fossil fuels. The cement industry, for example, has 90% of its emissions from tanker production. “One of our realisations is that you need a lot of technical knowledge to engage properly. I mean, I had to go look up my high school chemistry to figure out some in production,” says Moola, adding that the team’s debt financing strategy has worked well in holding these companies accountable to the targets that they have set out for themselves.

Debt, which rolls over every three to five years, allows Ninety One to engage with these companies continuously about their transition plans. If the companies fail to meet their targets over time, the firm has the right to decide whether or not they would continue allocating capital. Even though Ninety One says it is seeing good signs of climate target commitments from its portfolio companies, there is still no way it can truly hold a company accountable.

Achieving targets

Industry players and regulators alike are increasingly adopting various climate disclosure and frameworks in recent years — the EU, for one, has adopted the Task Force on Climate-Related Financial Disclosures (TCFD) as a standard. However, there is no one globally binding agreement that companies and governments have all taken on.

Moola believes that more than one standard will apply across the board, similar to credit ratings. Instead, she believes there will be a broader alignment on standards, the terms of disclosure plans and the assessment of transition plans.

Noting that the oil and gas industry is the “problem child” of the industry as it currently does not have a Paris-aligned pathway to decarbonisation, Moola says that there are only so many investors can do to push the sector to become greener.

“I think the push comes from several spaces; one is changing consumer behaviour,” she says. Should investors pull capital from oil and gas companies, the result will be a declining supply of fuel, which will drive up the prices of the commodity. “And if that’s all we’re doing, that’s a recipe for disaster.”

Moola says a multi-pronged approach is needed: While investors can talk to oil companies about supply, the demand perspective must also be tackled. “Significantly ramping up the alternative technologies that do not use fossil fuels, and that's why we go back to this idea of what we are looking to find,” she adds. “We're looking to find the solutions both in the global environment and emerging market transition because that's how you start to deal with the demand issue."

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