The world now has less than 10 years to change course and avoid the man-made catastrophe of the climate crisis, as countries race to create transition taxonomies, senior executives from two of the world's largest sovereign wealth funds (SWFs) said on Wednesday (March 23).
With three quarters of emissions coming from the energy sector, achieving net-zero emissions by 2050 will require a full transformation of the energy sector, which will come at a cost of approximately $2 trillion annually, said Knut Kjaer, the founding chief executive of Norges Bank Investment Management, at the Responsible Asset Owners Global Symposium.
The task is monumental but achievable, and will require a combination of different factors for carbon emission abatement, he said.
“The contributions will come 25% from replacing oil, coal and gas with renewables like solar and wind. Another 25% will come from more energy efficiency; 20% [will come] from electrification such as electrical vehicles, about 10% from hydrogen and some from carbon capture and storage,” said Kjaer.
Kjaer highlighted that the energy transition is also being propelled by the geo-political situation in Europe — making reference to the Russian assault on Ukraine. Russia has been a major supplier of oil and natural gas for Europe until this point.
“I cannot imagine in the time of ESG investing where we put so much consideration into investing with purpose that Europeans will continue to voluntarily buy energy from such an aggressive state,” he said.
For Kjaer, the green transition means boosting the investment in solar and wind farms. “We have all the potential, but we have lacked speed in the planning and realisation of the projects.”
Prior to the UN drafting its Principles of Responsible Investing (PRI) in 2000, the main form of ESG investing was to simply exclude high-emitting industries. In contrast, a key feature of the UN PRI was to favour active engagement over exclusion, said Kjaer, highlighting that this also became the Government Pension Fund of Norway’s strategy.
Kjaer explained that many of the older oil companies, such as Shell and Total, have been very active in making large investments to innovate and expand their technological capabilities beyond the traditional oil and gas industry.
“So divesting from those companies means that you are being less supportive of the green transition,” he said.
Instead, Kjaer encourages asset owners who have invested in these types of fossil fuel companies to try and engage them to enforce capital discipline, to promote innovation, and to ensure they do not waste capital on new fossil fuel projects.
“Otherwise, there is a risk of these investments becoming stranded assets, so be active in guiding these companies to go green.”
Around the world, billions of investment dollars are flowing towards projects considered green and environmentally aligned. Yet, institutional investors are still finding themselves in ambiguous territory when it comes to sustainable finance definitions, with a wide variety of differing interpretations available.
In response to this ambiguity, there are efforts underway to define sustainable investments by creating detailed rulebooks or green taxonomies. For example, the European Union (EU) has developed a comprehensive “EU taxonomy for sustainable activities.”
At an earlier session of the Responsible Asset Owners Global Symposia, Michael Kelly, chief legal and corporate affairs officer at the Ontario Municipal Employees Retirement System (OMERS), discussed Canada’s efforts to create a taxonomy for a rapidly emerging category of the trending sustainable finance movement called transition finance.
In a nutshell, transition finance focuses not only on individual projects that require funding, but also evaluates a project’s operator by their transition strategy towards decarbonisation, as well as the strategy's reliability and transparency. It is particularly pertinent to companies and industries that aren’t yet sustainable but will also need financing to become so in the future.
“In a country like Canada, with a lot of natural resource industries, whether it is fossil fuel industries, or forestry or other industries, we found that some of the projects that were ongoing don't neatly fit into some green finance taxonomies that are out there,” said Kelly.
While Kelly did not refer to the EU taxonomy specifically, in 2019, Canada’s Expert Panel on Sustainable Finance released its final report, which firmly renounced the EU transition finance definition because it would largely shut out Canadian oil and gas producers from investment.
“Is there not a space for countries that have high-emitting industries to make them less-emitting industries?” asked Kelly, discussing the concept behind Canada’s development of its own sustainable transition taxonomy.
“How can we go about encouraging finance into those areas? It's not an easy process, because it means getting a large number of people to agree on what does or does not qualify, so it is still a work in progress.”
The aim is to be able to identify projects that would qualify for transition financing, as well as markers that those projects would need to show to companies. “For example, a net-zero by 2050 commitment,” said Kelly.
“You can set up a taxonomy that actually channels transition finance into these industries to make them less emitting. And in doing so, you're taking emissions out of the atmosphere and doing something that is positive for the environment and putting these companies on a direction towards their net-zero 2050 goals.”