Investment manager’s stark warning: transition to net zero unlikely to be neat

Investment manager Ninety One has claimed that a transition to net zero is unlikely to be neat or methodological, and that evidence suggests the start of a “disorderly transition."

As well as what action policy makers take, according to Ninety One in a new research report, just how disorderly the transition becomes will be influenced by asset owners, investors, and companies’ own emission reduction plans.

The Network for Greening the Financial System (NGFS) proposes six transition scenarios, of which two were the focus on the research paper. One was ‘Divergent Net Zero’, namely net zero that is reached by 2050 but with higher costs due to disjointed policies introduced across sectors and a quicker phase-out of fossil fuels.

In the second examined scenario, ‘Delayed Transition’, global emissions do not decrease before 2030, fossil fuels prove difficult to displace, and far-reaching policies are implemented to limit global emissions. This leads to higher physical and transition risks.

Nazmeera Moola, chief sustainability officer at Ninety One, said: “Reaching net zero will rely on investment in new green infrastructure as well as investment in decarbonising high-emitting companies. Both are needed to achieve real-world decarbonisation.

“The highest-emitting companies and industries require investors who can own them, challenge them on the credibility of their plans, and hold them to account over time, as they evolve.”

The Sustainable Markets Initiative (SMI) transition categorisation working group, which included Ninety One, developed a methodology that defines transition assets across five categories. Within the SMI ‘Transition Categorisation’ framework, published in January 2023, the approach looks to help investors identify companies that are on a credible pathway to net zero.

As part of the analysis, ‘transition assets’ were identified as being committed to net zero and containing an emissions intensity at or close to net zero. This was in comparison to ‘stranded assets’, which are assets which cannot be Paris-aligned and have no plan to achieve net zero.

ESG intersection

The Ninety One research paper went on to stress that in a majority of cases new technologies will be required to help companies and nations decarbonise, giving the example of South Africa, the nation the firm was founded in.

The paper also argued that pronounced social issues in South Africa such as employment and workers’ rights take precedence over environmental considerations, and stated: “We cannot always simply put ‘planet’ before ‘people’.”

According to the research paper, there is “very little consistency” in terms of what criteria or thresholds are required to achieve a net-zero transition. Ninety One cited the example of requirements for an auto manufacturer to establish a Paris-aligned pathway compared to a cement company being “drastically different.”

Net Zero Investor recently spoke to Moola on the current challenges facing investment managers and potential opportunities in the African region.