Norwegian development fund says divesting alone won't achieve net zero
European investors and politicians have highlighted the need to balance green investments in Asia with those that promote economic growth and reduce poverty.
This includes projects required to facilitate the impact of green investments, such as improvements to electricity grids.
There is also a growing belief that divesting porfolios of carbon emitters won't achieve decarbonisation on its own.
Karoline Teien Blystad, senior manger for climate and impact at Norfund, Norway’s $4 billion development finance fund, speaking at the fund’s annual conference in Oslo in late May, emphasised the central conundrum for investors seeking social and environmental outcomes.
On the one hand is the central importance of economic growth in pursuing both social and environmental outcomes in the long term.
Norfund
On the other hand, there is a need to accecpt that this growth is likely to result in increased emissions in the short term.
"And [often] you can’t get the needed growth without increased emissions. You need cement, transport, steel for manufacturing.
"So, for our portfolio we had to ask: how important is that our own portfolio is lowering emissions, or do we accept that emissions may increase in the short term [to achieve] our objectives," she said.
As well as having significant investments in Asia, Norfund manages the highly Asia-focussed $1 billion Climate Investment Fund (CIM) on behalf of Norway’s Ministry of Foreign Affairs.
Between 2022 and 2027, Norfund has been charged with investing the money in renewable energy and low carbon technologies in India, Vietnam, Philippines, Cambodia, Indonesia, Sri Lanka, Bangladesh and South Africa.
REAL ECONOMY DECARBONISATION
Blystad explained how Norfund had opted to target ‘real economy decarbonisation’ by steering companies within the portfolio towards emissions reductions rather than divesting from high emitters. "We don’t think you can [achieve] net zero only through divesting."
‘Achieving a just transition, means investing in sectors that are key to development including sectors with potentially high emissions, with the aim of decarbonising those over time.
"So we focus more on the role that Norfund should play in the transition to net zero and less [on] optimising the portfolio to net zero," she added.
Espen Barth Eide, Norway’s foreign minister, noted that, where the economic incentives sometimes worked against investors seeking green projects, a strong regulatory regime was needed to coordinate green investment and maximise its impact.
This is especially true for frontier economies where regulation might be at an early stage.
He pointed to the example of replacing a coal fired power plant with one producing renewable power.
"If you then have a renewable system the unit price goes down, which is very effective for the country, although it is a problem for investors since what happens to the yield? So that makes the transition more complicated with countries with a weak regulatory regime,’ he said at the same conference.
GOVERNMENT ROLE
He added: ‘You must look at the administration framework. You have to balance access to capital [for companies] with access to projects [for investors], with the right framework for climate investment and regulatory stability.’
Eide emphasised the need to balance investments in renewable power with others such as spending on the grid.
These were challenging for two reasons, he noted.
In the first case they are projects which, on the face of it didn’t look like renewables allocations, but without which the impact of renewables projects would be limited.
Secondly, they require governments to coordinate them to achieve the best impact.
"Investing in renewables might give you a source of energy with a cheaper unit price but to do that you have to have a balanced availability and for that you need effective electricity grids and that requires organisation.
"It’s less expensive than administrative or cultural - it’s about making things work. So if you get the regulatory regime right you on the right track,’ he said.
Eide said that there were other complexities facing frontier economies seeking to attract investors, pointing to the risks investors faced around currency exposure and the administration of projects. ‘The lack of capital and the cost of it is a serious problem,’ he said.
GREEN CAPITAL ALLOCATION
Clara Barby, senior partner at Just Climate, the climate focussed private equity manager founded by one-time US presidential candidate Al Gores’s Generation Investment Management, emphasised the need to allocate green capital where it has the impact.
She noted that investing in renewable power projects that produced cheaper energy than those using fossil fuels should not be considered green investments.
Just Climate
‘Think of offshore wind, it’s a climate solution but the sector in the UK, has already come down the cost curve, so that it is cheaper than brown power.
"So, here an investment has zero emissions abatement: you’re not avoiding emissions, since the investment would have occurred anyway. You have to look at the solutions that will most bend the emissions curve; without that you’re not allocating [optimally]," she said.
Barby pointed to green steel, which uses green hydrogen to reduce the emissions entailed in steel production by up to 94%, and geothermal energy plants, as examples of a promising sector.