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John Green | COP27: Portfolio purity starves emerging markets; we need real-world impact

John Green | COP27: Portfolio purity starves emerging markets; we need real-world impact
08-11-22 / John Green

John Green | COP27: Portfolio purity starves emerging markets; we need real-world impact

The world emits around 50 billion tonnes of greenhouse gas emissions every year. About half of these emissions come from emerging markets. In the next 15 years, it is likely that 90 to 100% of the growth in greenhouse-gas emissions will originate in emerging markets. The way to address this challenge and influence real change is to invest significant private sector capital in emerging markets – or risk failure to achieve net zero.

Many asset owners and managers have set targets that focus on reducing carbon-portfolio emissions. Mechanistically applied, the consequence is often divestment that starves emerging markets of capital and leaves the problem of high emissions to worsen.

There is a growing and investable opportunity for private sector capital to play a meaningful role in the process of decarbonisation in emerging markets. The provision of finance to emerging market companies to support their transition plans is one example of this. To satisfy investors, support could be conditional on investee companies establishing credible transition plans and reporting the plan implementation milestones.

Our independently conducted research, The rise of transition finance, found that 60% of asset owners say fighting climate change is a strategic objective, with 51% saying their fund has emissions-reduction targets. However, only 19% use transition finance in their portfolios. Fewer still (16%) say their fund invests in transition-finance assets in emerging markets.

Notably, though, there is conviction among this 16%, with 86% saying expansion of transition finance in emerging markets is a priority. Asset owners and managers who simply divest from high emitters, particularly in emerging markets, are stepping back from powerful change levers in the fight to achieve net zeros.

Climate change is a problem for all humanity. We must lean into the challenge and put capital to work in ways that will help bring about a successful transition over time.  If we do not approach this in an orderly, inclusive and collaborative way, we are not going to solve the problem.

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