Lack of incentivisation halting transition finance progress

Data, risk and communication remain challenges for asset owners

To fund the innovation and infrastructure required to achieve a sustainable economy, an additional $126tn in transition finance will be needed globally from now until 2050. Asset owners are a key link in mobilising this capital. Voluntary carbon markets must be established, private capital moved at scale and multilateral development banks must work together to release more capital for climate action.

OMFIF and SGX Group brought together asset owners, insurers, asset managers, multilateral development banks and standard setters to discuss these issues at the Global transition finance summit in Singapore.

The summit opened with a stark reminder by Ambassador Majid Al Suwaidi, United Arab Emirates’ lead negotiator on climate change, energy and sustainability, that ‘By 2030 the developing world will need more than $2.4tn to address climate change – not a one-time payment but every single year.’ He highlighted that, without a major reform of the financial system, ‘it will be impossible to build the new zero-carbon system the world needs’, and that climate finance must be used in an inclusive way that supports the most vulnerable.

The role of financial products and tools

During the summit, asset owners discussed their role in transitioning capital markets, highlighting active engagement as key to this, as well as clear, defined transition pathways and strategies. Tools for evaluating and allocating capital, such as thematic and impact funds, are targeted towards climate mitigation. Climate ratings are also useful in evaluating a company’s progression towards net zero, but a large share of ratings is based on an entity’s business activities to avoid greenwashing.

While green bonds are traditionally used to finance already green and sustainable projects, they can also be an avenue for transition. One panellist gave an example of a steel producer that wished to raise funds for low-carbon production through green bonds. Transition bonds are being issued too, but investors have concerns over the ‘real additionality’ of these projects, so this remains limited. In portfolio alignment, transition plans and targets are a strong indication of a company’s progress, and negative screening is becoming an important tool for asset owners.

Clients are driving investors’ net-zero activities, yet investor alignment in emerging markets remains nominal. Capital still needs to be allocated, and the right infrastructure, products and tools need to be developed for supply to meet demand. SGX Group Chief Executive Officer Loh Boon Chye highlighted how exchanges are at the forefront between capital flows and needs, and engagement is central to this. Companies need the signal that adopting climate action indices can attract flows and liquidity.

Barriers to the transition

Data, information and communication hurdles remain challenging, as does the proliferation of standards, frameworks and taxonomies that have arisen to support the transition. Companies are still struggling to disclose scope 3 emissions, and in emerging companies there is a huge gap between disclosure and net-zero targets.

For pension funds, fiduciary duty and the need for return creates a challenge with transition, and risk-reward cannot be compromised. Leong Wai Leng, managing director and head of Asia at Caisse de dépôt et placement du Québec, noted that ‘in emerging markets and the tier below emerging markets… blended finance will have to come in’.

Joachim von Amsberg, special adviser to the president of the Asian Infrastructure Investment Bank, pointed out that blended finance has not reached an investable scale due to the lack of carbon pricing and carbon markets, which means there is little incentivisation and the transition is de-prioritised. He also highlighted the complexity of infrastructure projects and the high risk conditions in emerging markets leading to a lack of private investment.

To tackle this, Leslie Maasdorp, vice president and chief financial officer, New Development Bank, emphasised that the main focus of MDBs now is de-risking: using their creditworthiness and triple-A rating to take on the risk private institutions are not willing to. This is the new mandate of the New Development Bank – leading institutions to crowd in finance through helping governments reduce risk and bringing in private investment at scale.

Gathering information, planning and incentivising

Amanda Blanc, Transition Plan Taskforce co-chair and group chief executive officer of Aviva, highlighted that transition planning has ‘turbocharged’ net-zero action across the business. It has increased collaboration and, with the multitude of frameworks and guidance available, there is no longer an excuse not to start. Blanc also called for government and policy-makers to develop, implement and report against their own plans to provide mutual support and collaboration between the entire financial sector.

As Ma Jun, founder and president of the Institute of Finance and Sustainability, and Satoshi Ikeda, chief sustainable finance officer of Japan’s Financial Services Agency, observed in a panel focusing on the role of regulators, Europe is high on regulation but less on incentivisation. Jun said the People’s Bank of China is working to create mechanisms to reduce funding costs for higher-risk projects supporting transition to drive more capital allocation.

A key contention is the need to transition energy towards net zero, while supporting growth in emerging economies and managing energy security. It is important to remember different jurisdictions are coming from different levels of emissions and capacity. Ridha Wirakusumah, chief executive officer of the Indonesia Investment Authority, highlighted that, as countries grow, developed nations need to support emerging countries with technology and new markets to build green energy sources from the beginning.

The summit showed positive momentum: sustainable financial markets are growing, policies are being implemented and capital is being moved. But much more needs to be done to drive the global transition. As OMFIF’s Clive Horwood, managing editor and deputy chief executive officer, noted: the spirit is willing but the body remains slow. Time is running out and we must work together to drive net zero.

Emma McGarthy is Head of the Sustainable Policy Institute, OMFIF.

Catch up with all sessions on demand.

These themes will also be explored in OMFIF’s forthcoming Global Public Pensions 2023 report and the Sustainable Policy Institute Journal, Autumn 2023 edition.

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