Apac emerging markets struggle to attract climate investments – AIGCC report
Asia Pacific (Apac) countries including Australia, China, and India were deemed the least attractive places for green financing among the G20, according to a report released jointly by three investor groups. The findings come even as separate research by BlackRock found that investor reticence due to heightened risks in emerging markets is preventing capital from reaching countries that need it most to affect a transition to net zero.
Argentina, Australia, China, India, Indonesia, Mexico, Russia, and Saudi Arabia fared the worst as potential destinations for green investment among the G20, according to the G20 countries climate policy report card issued by the Asia Investor Group on Climate Change (AIGCC), Ceres, and Investor Group of Climate Change (IGCC) on October 18.
The report evaluated G20 countries’ performance based on their 2030 targets for global warming (less than, equal to, or more than 2 degrees Celsius); commitment or lack thereof to reach net-zero carbon by 2050; policy suites and whether they are consistent with the goal of containing temperature increase to within 2 degrees Celsius; share of domestic Covid spending that is green; and degree and specificity of mandatory disclosures around climate risk.
A MATTER OF POLICY
“Generally, in most markets, the main barriers for investment in the net zero emissions transition tend to be weak climate policy settings and energy market rules, subsidies for fossil fuels, and the current lack of investment-grade opportunities. Other key enabling tools, such as taxonomies, disclosure, and sustainable finance exchanges, are also critical,” Rebecca Mikula-Wright, CEO of AIGCC, told AsianInvestor.
On a national level, key considerations for investment in the climate economy of a particular jurisdiction include: whether it is striving towards appropriate emissions reductions relevant to its level of economic development; whether it has a clear energy transition away from fossil fuels that is consistent with keeping global warming to 1.5°C; and whether it is building the resilience and climate adaptation of fixed assets, said Mikula-Wright.
Drilling down to the company level, a firm’s commitment to lower emissions targets, while an encouraging sign, is by itself not sufficient for stakeholders to make a determination. Investors are looking for more detailed information to understand the implications of the climate strategy of potential investees, said Mervyn Tang, head of sustainability strategy, Asia Pacific at Schroders.
“For companies, we need to see detailed, costed transition plans on how they get [to emissions goals]. As an active asset manager, we believe that we have a fundamental role to play in encouraging large companies to take account of the urgent need to plan, and execute, a transition to net zero,” Tang told AsianInvestor.
Getting their policy mix right is critical for the G20 laggards to mobilise climate investments, the AIGCC report said. However, this task is complicated by the interplay between economic and climate change forces in Apac countries, which requires a policy or regulatory framework that strikes a balance between the two.
Tang noted that the Apac journey to lower carbon emissions has two salient features: first, the region is starting out with a more carbon-intensive energy mix, meaning the economic transformation needed to reach net-zero will be more substantial than in Europe or the US; and second, there are many emerging economies in the region and they require a transition path that sustains economic development.
RISKY BUSINESS
That said, policy ineffectiveness is only one part of the challenge for Apac emerging economies such as India and China, as they seek more climate financing. The relatively low appeal of certain Apac nations for green financers, coupled with investor reluctance regarding emerging markets as a whole, deal a double whammy for those countries that belong in both categories.
The overall perception of emerging markets is that they are “high risk” and these risks, which centre around political stability, legal enforcement, reputational concerns, and macroeconomic management, are difficult to diversify, research published this month by the BlackRock Investment Institute (BII) showed.
“None of these can be meaningfully solved by ‘climate policy’: working on climate-specific capacity building won’t do anything to address the more fundamental country risks,” the BII report said.
“These kinds of risks cannot be managed by clever private sector financial structures or financial engineering. Unless they are mitigated, private investors will continue to hold back. As a result, the risk/reward balance is unfavourable for private investors and many are deterred – or prohibited – from investing in emerging markets,” it added.
The problem is exacerbated by the fact that even if emerging market countries do undertake institutional or structural reforms, it will still be some time before the benefits of those moves can be seen, the BII report noted.
Another policy tool that can be instrumental in unleashing private capital at scale is the use of public funds. However, because deployment has been focused on financing individual projects instead of reducing broader risk, the impact of these public funding programmes has been limited, the report pointed out.
The allocation of public budgetary resources should be underpinned by de-risking and the provision of funds at a facility level, as opposed to project by project, the BII report suggested. Directing public finances towards the establishment of green banks, mechanisms such as auctioned carbon price floors, and providing guarantees and credit enhancements that enable securitisation of assets can enhance effectiveness, it said.