If public investors want to decarbonise their portfolios, the solution is simple. They should simply divest from positions in carbon-intensive sectors. The difficulty for asset owners is to drive the green transition in the real world. Active engagement with portfolio companies is crucial to achieve this goal. This is a key message that emerged from the Global transition finance summit 2023 in Singapore, an event organised by OMFIF and the Singapore Exchange.
This event convened asset owners, fund managers, regulators, multilateral development banks and others to discuss how to best mobilise capital to meet net-zero targets. Among the many speakers on the day were senior representatives of major public pension and sovereign funds.
An important point raised was to differentiate between achieving net-zero portfolios and actively driving the energy transition. ‘If you want to get to portfolio decarbonisation it’s called divestment… the ultimate question is does that really help the world to decarbonise?’ said Liew Tzu Mi, chief investment officer of fixed income and multi asset at GIC.
This message was echoed by Thijs Aaten, chief executive officer of APG Asset Management Asia, who stated ‘You can make your portfolio green by just diverting your flows… the hard work is in helping companies make this transition and have a real-world impact.’ Accordingly, for asset owners to make a difference, they will need to ensure industries become ‘greener’ rather than simply exit positions in carbon-intensive sectors.
The consensus was that active engagement is a key tool to achieve this goal. Dialogue with portfolio companies should be a two-way process that considers the idiosyncrasies of different markets. Liew from GIC said ‘if you impose a top-down approach for a decarbonisation pathway across every part of your portfolio, it is neither realistic nor constructive’. Similarly, Snorre Gjerde, lead investment stewardship manager, corporate governance at Norges Bank Investment Management, mentioned engagement is ‘about listening to the challenges the companies are facing to understand how we as an owner can be supportive’.
Such discussions can reveal tensions between different interests. Leong Wai Leng, managing director and regional head of Asia Pacific at Caisse de dépôt et placement du Québec, recognised that portfolio companies need ‘to be accountable and be committed to subject themselves to external technical audit [to decarbonise], and to also manage the domestic stakeholders, be it local community or local government, and all interests may not be specifically aligned’.
For instance, in emerging markets that rely on cheap, carbon-intensive energy, rapidly shifting towards more costly renewables would have a dramatic detrimental impact on households and firms. It is therefore important to acknowledge that ‘net zero is different for different countries’, as Ridha Wirakusumah, chief executive officer of the Indonesia Investment Authority, pointed out.
As well as active engagement, public pension and sovereign funds have the power to effect change through their asset allocation decisions. Liew from GIC flagged the potential of sustainability-linked bonds as a ‘forward-looking’ asset class that is ‘more encompassing’ than green bonds to ensure companies are incentivised to transition their entire operations to cleaner fuels, rather than to ringfence funding for specific green projects. Meanwhile, Leong of CDPQ stated that, alongside renewables, ‘We think there is room for us to be exploring… materials and energy storage, like hydrogen.’
Clean energy investments are also of keen interest to sovereign funds in commodity-exporting countries. Wirakusumah stated one of the four industry verticals at INA is renewables and it has deployed ‘almost $3.5bn… in areas of green’. As an example, he referenced a public equity investment with Masdar in the Indonesian company Pertamina Geothermal Energy. Meanwhile, Ali Al Khalifa, chief executive officer of the Bahrain Future Generation Reserve Council, mentioned the fund is ‘much more focused on solar energy’, given the ubiquitous sunshine in the region.
The public sector has an important role in underpinning the transition. CDPQ’s Leong mentioned that within Asia, ‘in emerging markets and the tier below emerging markets… blended finance will have to come in’. The provision of developmental capital from governments, multilateral development agencies and other bodies in developing economies can improve the risk-return profile and encourage the involvement of pension and sovereign funds, which ultimately have a fiduciary responsibility to deliver returns to their stakeholders.
The public sector can also help by enforcing consistent reporting rules. Gjerde from NBIM mentioned the importance of ‘strong standards for… company disclosures and practices’ to allow for better comparison across markets, and to harmonise the demands for portfolio companies. NBIM has therefore been ‘very supportive of the efforts of the International Sustainability Standards Board to provide a global baseline for sustainability reporting’. Even so, Gjerde recognised that ‘data is a very real challenge’, suggesting this issue has not been fully resolved.
There are heighted demands for public investors to actively engage with portfolio companies while seeking sustainable investment opportunities to assist with the green transition. This is not a simple task in the absence of clear regulation or abundant data. Amanda Blanc, group chief executive officer of Aviva, offered useful advice on this front: ‘Don’t let the desire for perfection be the enemy of delivering the right results.’
Nikhil Sanghani is Managing Director of Research, OMFIF.
These themes will be further explored in OMFIF’s Global Public Pensions 2023 report, launching 30 November. Register to attend the virtual launch here.