Transition finance gains traction with Asian asset owners
Transition finance is rapidly gaining momentum in the region as more asset owners announce decarbonisation goals, although questions swirl around the extent to some institutions can get involved in helping polluting industries to transition.
Experts that AsianInvestor spoke to said that transition finance is a hot topic with asset owners in the region as they seek to know more about how they can participate in the growing financing opportunities springing up across the region.
“Transition financing is a very big topic in the conversations we are having with our clients in the region," Karin van Baardwijk, CEO of Dutch asset manager Robeco told AsianInvestor, noting that there is growing demand for Asia-oriented solutions.
Robeco
“Investors see the need for transition financing, whether it’s from a reputational perspective or an alpha generation perspective, because many of them are also seeking out investment opportunities in the broader theme of sustainability.”
With growing net-zero promises, the Network of Central Banks and Supervisors for Greening the Financial System announced on May 31 the launch of a blended finance initiative to promote transition financing.
The network, chaired by Singapore central bank Managing Director Ravi Menon, also plans to issue a handbook on blended finance at COP28, the United Nations Climate Change Conference or Conference that will be held in Dubai, UAE, in November.
"We will use our convening power to raise awareness of blended finance for climate action and help to bring the relevant parties into the room,” Menon said in a May 31 speech.
“We will identify any potential market, policy or regulatory barriers that hamper the scaling up of blended finance.”
Blended finance -- the strategic use of development finance and philanthropic funds to mobilise private capital flows to emerging and frontier markets -- and green bonds are in the spotlight as the most likely routes to help the decarbonisation plans of companies.
GROWING INTEREST
Emerging markets and developing economies account for more than half of global gas house emissions.
They are still heavily dependent on fossil fuels for their economic development and energy needs.
Transition finance aims to provide funding to high carbon-emitting industries -- such as coal-fired power generation, steel, cement, aviation and construction -- to help them transition to cleaner and greener forms of energy.
Robeco's head of Asia sales Graham Elliot said that investment opportunities in transition financing iare particularly appealing in Southeast Asia and China in particular.
That is similar to the views of other asset managers in the region: HSBC Asset Management recently told AsianInvestor that there is rising demand from Chinese and foreign asset owners for investments in China’s energy transition.
Several asset owners have told AsianInvestor that they are embarking on decarbonisation plans as well as keen to participate in transition financing opportunities.
John Pearce, CIO at UniSuper in Australia has said decarbonisation means investing in industries that will facilitate the transition.
Hong Kong Monetary Authority’s HK$4 trillion ($509.6 billion) Exchange Fund also said it will explore private equity investments in energy transition in emerging markets, among other opportunities.
Prudential is engaging a mixture of advocacy and blended finance in its ESG framework to encourage the shift towards low-carbon economies across Asia's emerging markets.
Still, the insurer notes the main challenge is the lack of investable green opportunities denominated in local currencies in the region.
MAKING A REAL IMPACT
“This (transition financing) has really become one of the most talked about topics in Asia. I think over the next 12 to 18 months, there will be a need for taxonomy. And this is where key regulators such as Monetary Authority of Singapore or Hong Kong Monetary Authority will play a part,” said Robeco's Elliot.
An efficient framework for transition finance is needed to help companies reduce the potential negative consequence of a disorderly shift, such as transition risks related to the environment, limited access to inexpensive and dependable energy, unemployment and possibly broader social implications.
Many investors focus on portfolio decarbonisation and choosing investments to make them look green, but that doesn’t solve the issue of transforming heavy emitters, according to experts.
Many institutions have investment mandates that prevent them from investing or engaging with companies that are seen as ESG-unfriendly, said Roman Novozhilov, head of ESG at New Development Bank.
New Development Bank
“Will they be able to engage with companies as they go from brown to green gradually or does their mandate prevent them from engagement completely? That is the question,” he said at a panel discussion at AsianInvestor’s flagship Asian Investment Summit on May 18.
He added that multilateral development institutions such as the Asian Development Bank are doing good work in promoting transition financing, adding that he sees huge potential for financing transition plans of companies.
To engage or to not engage with high-carbon emitters remains a hot topic of debate for investors.
"From a transition perspective, it’s good to allocate your time, effort and money in a transition from brown to green, which means that you also need to engage with parties or laggards,” said Robeco's van Baardwijk.
"It’s not just green to greener, it’s going from brown to green and everything that you do in between. For me, from an global impact perspective, that is where you start to make a difference."
But such engagement brings its own set of problems both from a regulatory and reputational perspective, she noted. “Companies worry about how such engagement (with polluters) reflects on them – is it good or bad?”
“I think the broader conversation on transition is something to be mindful of,” she said.