Green strategies like ESG-branded properties are designed to have a smaller carbon footprint. However, in some cases this means abandoning carbon-intensive industries rather than taking reasonable steps to reduce emissions.
Transitional finance is related to real impact. For example, it could be an investment in the steel industry, which is based on the receiver’s approach of zero returns. It could be investments in infrastructure that we want to move away from fossil fuels, or investments in innovative companies or projects that need capital to reduce greenhouse gas emissions.
Ninety-One Global Chief Investment Officers conducted a survey of 300 top asset owners around the world to explore the potential for financing the transition. A majority of respondents (60%) said that combating climate change is one of their foundations’ strategic goals, and nearly half (51%) of their foundations have emission reduction goals.
At first glance, these figures paint an encouraging picture. However, only one in five (19%) say they use bridging finance at any level, and even fewer (16%) say their fund invests in bridging financial assets in emerging markets, which are experiencing the highest growth in emissions.
The survey shows that property owners are more likely to use other investment methods to account for climate change, such as climate-related issues and positive selection. So why isn’t bridging finance more widely used?
A framework for sustainable development
More than half of the assets surveyed (55%) say their funds are not focused on anything other than the risk and return of their assets, while 40% believe climate-related investments have low returns.
“Most investors grew up in an era where sustainability was often affordable,” said Alison Luat, managing director of sustainability investing and innovation at OPTrust, a $25 billion Canadian pension plan. “There’s been a big shift in thinking because it’s not always right, but for many, this structure still exists.”
Faith Ward, chief investment officer at Brunel Pensions Partnership, says a clear policy framework and strategy is needed to encourage wealth owners to shift their focus to financial transition. “We need political positions and we need laws to support them,” she said. Coordinated financing and close cooperation between development banks and investors is widespread. It must all be brought together and understood that there will be different solutions in different markets.
New markets need attention
More capital needs to be invested to help emerging markets decarbonize and transition to clean energy. The International Energy Agency says that to keep global warming to 1.5 degrees Celsius by 2030, $4 trillion is needed to invest in clean energy projects and infrastructure. There are more than three contingent liabilities and more funding is needed in emerging markets.
More than half (53%) of ninety-one survey respondents are concerned about the risk and return profiles of their funds in a changing market financial world. Some are looking to work closely with their advisors to support financial investments during the transition, especially for emerging market opportunities.
“They need different skills, knowledge and experience in emerging markets,” said a senior executive at a European property owner.
Property owners have capital and influence
More than half (56%) of property owners believe that if they invest more in transition financial assets, the world will not be able to achieve the goals of the Paris Agreement.
Among property owners, property managers and consultants, some say there may be a change in culture or approach. “I think a lot of people who have ‘sustainability’ in their title would spend a lot of time creating art if they changed their culture,” says Alison Loth of Optirest.
Property owners are in a unique position. They have the capital and influence to help change the world. By allocating capital for the transition, businesses and sectors will benefit from zeroing in on the impacts of climate change.