The next frontier in transition finance
Global public funds are ensuring the sustainable transition remains on track
Political opposition, in the US and elsewhere, to taking action on climate change has made investing in the transition to a sustainable, de-carbonised global economy much more challenging. At the same time, the physical impacts of climate change are becoming more apparent and more costly, and the economic risks posed by an uneven transition are growing.
For long-term investors, such as the world’s largest public pension funds and sovereign funds, this poses a dilemma. They recognise the economic threat posed by a destabilised climate, and they understand the technological and social trends in favour of the transition. But they are also mindful of the near-term threat to many climate-orientated investments from the changed political environment.
To better understand how these investors are navigating the evolving landscape, OMFIF’s Transition Finance Working Group convened for the second year. Alongside Moody’s Ratings and the MSCI Institute, OMFIF held bilateral meetings with public funds from both developed and emerging markets to delve deeper into the priorities and concerns of this group of investors.
The conclusions of these conversations have informed a new report: The next frontier in transition finance. It finds that pension funds remain committed to the need to transition to a net-zero economy, despite rollbacks in other areas of the financial sector, and they have their sights set on adapting to a new future.
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Key findings include:
- Risks and investment flows are changing as a result of the U-turn in US federal climate policy. Climate-orientated capital is now flowing towards countries continuing to support clean energy development, particularly in Asia.
- Funds are noticing that the companies they invest in are delaying or scaling down their net-zero targets as a result of the change in US policy, but it is business as usual for the funds themselves.
- Adaptation is creating economic opportunities for companies selling goods and services that can help others become more climate resilient.
- In developing economies, blended finance will be vital to deliver the transition at the scale needed. While there have been some successful examples, barriers exist to its growth.
- Funds increasingly recognise the links between nature and a healthy global economy. However, investors are still at an early stage of assessing their impacts and dependencies on nature.
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