Targeting effectiveness in investing for an inclusive energy transition

Johannesburg - Ninety One has published its annual Planetary Pulse Report, ‘Asset owners weigh risks and opportunities of investing for an inclusive energy transition’. The report explores asset owners’ investment approaches to the risks and opportunities presented by climate change.

The research investigates asset-owners’ strategies and investment through the lens of real-world impact, in terms of the targets they set, the frameworks in which they operate, and the practices they implement. The findings show that asset owners are deploying a broad spectrum of approaches, from setting targets for entire portfolios to investing in the efforts of high emitters to achieve their own transition pathways.

A recent report by the UN highlighted that global CO2 emissions, fossil fuel production and consumption urgently need to peak and swiftly decline to keep the Paris Agreement’s temperature goal within reach. The latest IPCC report supports this argument by modelling five different future emission scenarios, each of which indicate that global surfaces are expected to hit at least 1.5 degrees, calling for the world to drastically reduce emissions now.

Climate-focused targets: moving to a granular approach   

Our survey shows that almost half of asset owners (48%) have between one-quarter and half of their assets under management (AUM) invested in portfolios with climate-related instructions or objectives, up from 40% in 2022.

The picture remains stable for Southern African asset owners, with 66% of respondents saying they have over one-quarter of their AUM invested in these portfolios. However, they are the least likely (28% vs. 41% across other regions) to state that financial institutions have a responsibility to fund the decarbonisation of high emitters in emerging markets.

Greater awareness of the trade-offs

Our research suggests there is a disconnect between decarbonisation intentions and outcomes, with 55% of asset owners who implement climate-related factor integration as a tool saying it contributes more to portfolio decarbonisation than to reducing emissions in the real world.

Interestingly, transition finance displays an inversion of this pattern, with 34% saying it makes a significant contribution to portfolio decarbonisation, compared to 52% who say it is lowering real-world emissions.

Closer to home, all Southern African respondents consider transition finance to contribute strongly to lowering real-world emissions, while 75% say the same about negative screening.

The transition finance opportunity

Our survey shows that 51% of asset owners agree that financial institutions have a responsibility to help fund the decarbonisation of high emitters. However, less than half (40%) report that their fund currently owns or manages transition finance investments, with over a third (35%) saying they will likely be making transition finance investments within the next 12 months.

Transition finance is implemented by a mere 7% of Southern African respondents, showing a strong disconnect between their decarbonisation intentions and outcomes. Negative screening, however, appears more popular among these respondents, with 41% saying they use this technique.

60% of consultants globally say they advise clients to make allocations to transition finance, even where this could increase portfolio carbon intensity, while just over half of respondents (51%) state that emerging-market transition finance is a major commercial opportunity for asset owners. However, 52% also appear concerned about the risk/return profiles available in the universe of emerging-market transition finance assets.

Nazmeera Moola, Chief Sustainability Officer at Ninety One: “The energy transition is undoubtedly the biggest systemic shift of this generation. As a result, the universe of investment opportunities has exploded to build the foundations of a new era and support the development of market leading innovations. Transition finance is being clearly recognised for its real-world credentials beyond meeting portfolio decarbonisation targets.

However, asset managers are still faced with challenges whilst implementing climate-related investment practices, and they need to be able to capture the full picture of their portfolio’s emissions to measure climate impact. Now, more than ever, we need to bridge the gap, collaborate and act as a driving force to meet the 2050 climate goals.”

Ninety One’s research, conducted independently by FT Longitude, surveyed 300 asset owners and consultants across eight sub-industries. Making up the respondents were 125 in Denmark, Germany, the Netherlands, Switzerland, and the UK; 80 in the US and Canada; 60 in Australia, Hong Kong and Singapore; and 35 in Botswana, Namibia and South Africa.