In Focus: Transition finance trending among life insurers
Japan's Nippon Life Insurance recently announced guidelines for extending transition finance loans to steelmakers and utilities, which it hopes will serve as a benchmark for domestic lenders and businesses.
"As Japanese utilities and steelmakers operate globally, their transition strategies have come under scrutiny on whether they are green or not. We hope the guidelines can serve as a tool for them to explain their approach to investors," Yasutoshi Miyamoto, general manager at Nippon Life's finance and investment planning department, said at a news conference.
In accordance with the guidelines, Nippon Life developed quantitative metrics to evaluate whether a company or its project complies with the standards established under the Paris Agreement on climate change, and is therfore eligible for transition finance loans.
Transition finance provides funding to high-emitting companies for shifting to greener practices. However, the lack of agreement on what qualifies as "transition finance" has raised concerns that it may enable these companies to maintain their high-emission operations.
JOINING PEERS
Nippon Life is joining other insurance group’s efforts for transition finance.
Hong Kong-based AIA Group believes that some of Asia’s developing regions have the potential to further support energy transition into more sustainable sources, with the insurance group seeing a business model to finance it.
For developing economies, the efforts are best done by spreading the existing technological opportunities beyond the reach of more traditional financing in developed economies, according to Mark Konyn, group chief investment officer at AIA.
“One of the things of energy transition is to promote a fair transition. We have already heard estimates for the cost of transitioning our dependency on fossil fuels, but the real problem gets felt within the poorer communities,” Konyn said in March.
Also read: AIA sees scope to finance sustainable energy in Asia
At Prudential plc, the insurance group has moved beyond the relatively low-hanging divestment fruits and is instead actively engaging with portfolio companies when needed.
“We want to support companies with their own transition efforts and help them understand why they need to disclose to CDP [the Carbon Disclosure Project] and why they need to set up targets aligned with science. We raise their awareness of what a credible climate transition plan is,” Diana Guzman, group director of environmental, social and governance (ESG) at Prudential, said in September 2023.
Also read: Prudential eager to engage with portfolio companies to decarbonise
MANY QUESTIONS
Other asset owners are also pushing the energy transition agenda, including Rockefeller Foundation that sees a need to achieve a 50-fold increase in demand for carbon credits by 2030.
For this to be achieved, several questions need to be answered, as the foundation directs 50% of its efforts to the scaling strategy of transition credits, a type of high-integrity carbon credit, and 50% to build the methodology.
Also read: Rockefeller Foundation makes a push for transition credits
"How will the carbon market ecosystem approach this emerging instrument? Can we present a cohesive strategy for transition products to scale in the market? Can we ensure sufficient engagement from buyers and off-takers to build demand in both compliance and voluntary markets? And can we find 50 projects or asset owners willing to take this risk? These are some critical questions,” Joseph Curtin, managing director for power and climate at the Rockefeller Foundation, said in May.
Also read: How AIIB finds credit plays in emerging markets using an ESG lens
Asset owners are well aware of the importance of environment, social and governance (ESG) and climate action investing, yet they can be hampered by 'legacy' situations and a smaller investment universe.
“The challenge lies often in issues such as when a financial structure is created by a product manager for, say, net-zero, the underlying assets sometimes have legacy portfolio companies that don’t necessarily meet the current requirements of ESG and climate change, Dong-ik Lee, director general, investment operations at Asia Infrastructure Investment Bank, said in May.
“We have to be flexible in how we interpret and handle the situation. We understand the realities of the market,” he added.