Ninety One: ‘only 16% of asset owners invest in emerging market transition finance’
Planetary Pulse report suggests there is insufficient cross-border public and private finance to fill the shortfall.
Just 16% of asset owners currently invest in emerging market transition finance, according to Ninety One’s annual Planetary Pulse report.
The rise of transition finance study surveyed 300 senior professionals at asset owners across the UK, Southern Africa, Asia Pacific, Western Europe and North America. It reveals that while 61% believed transition finance in emerging markets would grow rapidly over the next three years, 53% say their fund was concerned about the risk-return profiles in emerging market transition finance assets.
Transition finance aims to help companies, particularly those in high-emitting sectors, to align with Paris Agreement targets by providing the capital needed to facilitate progressive emission reductions
Emissions and populations are growing fastest in emerging markets. At COP26, countries pledged $350m to adaptation and $600m to the Least Developed Countries fund, intended to bolster resilience to climate change in the countries most vulnerable to it.
On day four of the Glasgow conference, UN Special Envoy for Climate Action and Finance Mark Carney said there would be a pool of capital carved out of the $130trn additional investment needed for the global transition to net zero, for emerging and developing economies.
Many have since argued those pledges have not borne fruit.
The risk-return over 20 years in emerging markets corporate debt is actually very attractive. Transition financing goes towards financing grids and other infrastructure, but it also goes to corporates.
Investment gap
It is currently estimated there is a $94.8trn gap between existing commitments and investment required for emerging markets to transition to net zero by 2060, according to Ninety One, surpassing global GDP.
Nazmeera Moola, Ninety One’s chief sustainability officer, told Net Zero Investor that there is a “lack of familiarity” among asset owners when it comes to relevant asset classes, such as emerging market corporate debt, with investors more used to emerging sovereign debt or listed public equity.
“The risk-return over 20 years in emerging markets corporate debt is actually very attractive. Transition financing goes towards financing grids and other infrastructure, but it also goes to corporates. Corporates are often ahead of governments on this.”
Moola explained that there was a common misconception around how much concessional finance was needed. She said that over 50% of projects were initiated by the private sector and could be financed on commercial terms. However, she added that even in this component, there was a role for “concessional catalytic funding”.
“It is important to note that there is a difference between real risk and perceived risk. People need to get involved. The only way to get comfortable is to do,” she said.
When asked whether regulation was the answer, Moola said such a move would clash with trustee fiduciary responsibilities.
Kunal Desai, fund manager for global emerging market equities at GIB Asset Management, said emerging markets were being starved of capital.
“Asia contributes roughly 50% of global carbon emissions but clearly needs to balance developmental needs. Their decisions, particularly on infrastructure build, will shape how climate risk evolves for all. However, despite this urgency, there remains insufficient cross-border public and private finance to fill the financing shortfall.”
Desai explained that de-risking was required to mobilise private capital, which in turn would require a material scaling up of “direct budgetary resources”.
Increasing grant equivalent funding for first-loss arrangements could help mobilise capital, he explained.
