Institutions study new strategies to tackle energy transition
In the race to achieve net zero, institutional investors are coming to realise that no amount of investment in alternative energy will meet climate goals alone. It is now time, they say, to see big polluters as partners in the energy transition.
John Pearce, CIO at UniSuper in Australia says that, for him, decarbonisation means investing in industries that will facilitate the transition.
“It’s impossible to decarbonise without essential metals like copper and steel, and we see companies that produce these products as part of the solution."
With many institutional investors focused merely on a reduction of their own reported carbon emissions - or on reducing ‘portfolio carbon’ - there is increasingly a lack of vision in the investment community, say market experts.
SHORT-SIGHTED STRATEGIES
“By myopically focusing on portfolio purity and picking and choosing investments that make them look green, without having to advocate for real-world carbon reduction, they aren’t effecting the kind of change needed to tackle the climate crisis,” said Hendrik du Toit, founder and chief executive of asset manager Ninety One, in an online paper.
“All they are doing is creating discrete so-called clean portfolios. They are leaving the problem of heavy emitters to others, perhaps even to bad owners.”
Chris Trevillyan, director of investment strategy at Australian asset consultant Frontier Advisers told AsianInvestor that investors will need to invest in high emitters, “but with a clear plan and direct actions to reduce the emissions in those businesses”.
In a typical global equity portfolio, a reduction of 50% exposure in the BRICs (Brazil, Russia, India and China) plus Indonesia will lead to a 3% reduction in reported portfolio carbon intensity. The weight of those countries in the index is just 8%.
“This gives institutional investors an incentive to divest and avoid these markets,” said Du Toit.
Instead, he said the financial community needs to scale up the creation of financial instruments that help asset owners channel capital to investments that move the global economy closer to carbon neutrality and which also enable poorer nations the opportunity to participate in the net-zero transition.
GOVERNMENT ACTION
In the US, last year's Inflation Reduction Act aims to jump-start research and development and commercialisation of technologies such as carbon capture and clean hydrogen. It directs nearly $400 billion in federal funding to clean energy, with the goal of substantially lowering the nation’s carbon emissions by the end of this decade.
Technology entrepreneur and investor Paul Sandhu said this is a major boost for the sector, but notes there has been a slow pace of funds set up to direct capital to these areas.
It is China where he sees some of the greatest renewable energy opportunities currently.
“China definitely has an edge on renewables,” he told AsianInvestor. “It’s developing photo-electric cells and natural gas alternatives and there is a refocus on wind and solar that sets up well for private markets investment.”
ASIA FOCUS
In Asia, electricity production and transmission are the key areas of capital focus.
Many emerging markets, such as India and Indonesia, still rely heavily on coal for electricity production, with fossil fuel accounting for 25-40% of total carbon emissions. Transport accounts for a further 9-18%.
Since electric vehicles need a clean energy grid to deliver any real benefits, by cutting emissions from electricity production, it is possible to tackle 40-50% of total emissions in many emerging markets.
“Distributing power over a long distances is a crucial consideration in Asia Pacific. It will require governments to work closely with finance and power generators,” said Du Toit.
“Available capital must be scaled up for renewable energy roll-out. That requires a concerted effort across public and private markets and incentives to be considered across the capital structure.”