Transition Finance Will Capture ESG Attention

“Transition finance” is shaping up to be one of the biggest issues of the new year for anyone who claims to care about the climate crisis. “A whole world of transition finance” is being created right now, said Mark Carney, UN special envoy for climate action and finance, during a panel discussion at COP28 in Dubai last month.

The conversation has “matured from talking about investing in the climate to investing in the transition,” said Annika Brouwer, sustainability specialist at Ninety One, a South African company dedicated to transition financing.

At least half of the South African asset manager’s commitments in Dubai focused on transition finance for emerging markets.

The term was part of the final agreement between 200 nations in which they agreed to abandon fossil fuels. However, there is a lot of room for maneuver. In the non-binding document, countries are only asked to contribute to a global transition.

In other words, fossil fuel companies have few limits on how and when they will participate, said Ehsan Khoman, head of commodities, environment, social affairs and governance and emerging markets research at MUFG Bank (EMEA) based in Dubai.

It also gives room for maneuver to investors, including those with so-called sustainable mandates. The term “transition finance” is loosely defined as investments primarily in industries and infrastructure that help drive efforts to achieve a net-zero economy. It is different from green financing, which usually targets so-called climate solutions, such as wind farms or battery plants.

Even so, Chuka Umunna, head of ESG and green economy investment banking at JPMorgan Chase for EMEA, affirms that the change in tone is opening the doors to strategies that were faltering a few years ago. Concern over accusations of greenwashing previously thwarted efforts to develop a transitional bond label for debt capital markets, but there is now “a lot more appetite to discuss it,” he said.

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Coalitions of banks, insurers and asset managers are debating whether to put limits on what constitutes transition finance

However, for now, there is no coherent standard.

The Glasgow Financial Alliance for Net Zero proposes that the investment strategy include financing traditional green activities, such as renewable energy or electric vehicles, as well as polluting companies that plan to decarbonize and even large emitters, such as coal plants, whenever they are in the process of closing.

What unites most proposals around transition financing is the belief that, rather than simply cutting ties with high-emitting companies, financial institutions should help polluting companies gradually phase out their emissions. activities or to put them on a path to reduce emissions.

“You have to go where the emissions are and try to reduce them,” says Curtis Ravenel, senior advisor at GFANZ. The group is co-chaired by Carney, former governor of the Bank of England and chairman of Bloomberg, and Michael R. Bloomberg, founder and majority owner of Bloomberg LP, parent company of Bloomberg News.

However, for investors concerned about sustainability, all this raises a question: Are there assets that don’t qualify? And for those pollutants that do meet the requirements, how can investors be confident that they will decarbonize at the expected speed and scale?

These details are all the more critical as some climate finance funds announced at COP28 aim to invest in transition assets. For example, part of Alterra, a $30 billion company launched by the United Arab Emirates with Blackrock, TPG and Brookfield Asset Management, will go into transition funds. But there are few immediate details about how they are structured.

The way to “stay honest” and avoid “the slippery slope” of investing in assets that are not actually decarbonizing is to have standards in place, said Nazmeera Moola, director of sustainability at Ninety One. Ideally, you would penalize companies that do not meet their environmental commitments.

“If you’re investing in a company that’s looking to make the transition, you have to have a really solid plan,” agreed Kate Levick, who leads E3G’s sustainable financing activities. “Regulatory expectations are taking hold, but it is a race to get there and also to converge so that we don’t have fragmented regulatory gaps.”

Sustainable finance in brief

Norway’s largest pension manager divested $15 million from Gulf companies over fears they could facilitate human rights violations, while delisting Saudi Aramco over climate risks.

KLP, which oversees $70 billion, has excluded a dozen companies listed in Saudi Arabia, Qatar, the United Arab Emirates and Kuwait from its investment universe. The divestments mostly reflect an “unacceptable” risk of contributing to human rights abuses, KLP said. Among the excluded companies are companies in the real estate sector, where, according to KLP, migrant workers from Africa and Asia have suffered discrimination and human rights violations.

“The Gulf States continue to be characterized by authoritarian governance systems that restrict freedom of expression and political rights, including those of critics and human rights activists,” Kiran Aziz, head of responsible investments at KLP, said in a statement. .

The U.S. Securities and Exchange Commission’s failure to complete an ambitious climate agenda by 2023 is making environmental activists nervous.

The global sustainable debt market could struggle to surpass its high mark again for the third year in a row, as borrowers face additional labeling costs, higher interest rates and greater ESG scrutiny.

Swiss climate activists say they have collected enough signatures for a national vote on a new tax on the rich to cover the costs of climate change.

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(Featured image by JuergenPM via Pixabay)

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