Sustainable investing

A disorderly transition

Evidence suggests the transition to a low-carbon economy will be disorderly. By allocating to ‘transition assets’, investors can mitigate some of the disorder, while potentially generating positive outcomes for their portfolios. This paper makes the case for transition investing, and explains how to identify a true ‘transition asset’.

Mar 7, 2023

25 minutes

Chapters

01
Fast view
02
A matter of how disorderly
03
Are asset owners embracing transition investments?
04
Developing a transition framework
05
Transition investments for asset owners
06
The impact of transition finance on portfolios
07
Actionable steps
08
Breakdown of climate strategies
01

Fast view

Circle texture in concrete
A transition to net zero is unlikely to be neat or methodological. Industries will not find low-emission technology that steadily reduces global emissions by 7.6% each year; a pace of reduction which would halve emissions by 2030. As timelines lag there is likely to be a scramble to catch-up.

We already see signs of shifting supply and demand patterns creating volatility, not to mention protectionism, in markets. Evidence suggests we are at the start of a disorderly transition. Next to the actions of policy makers, how disorderly the transition becomes will be influenced by asset owners, investors, and companies’ own emission reduction plans.

The transition requires huge investment in new green infrastructure. But reaching net zero depends on more than this. High emitters in traditional ‘smoke-stack’ industries require funding to spur their transition to a low-carbon world. Just how much funding and the conditions upon which it is received becomes the crucial question. There are five economically important, high-emitting sectors where successful transitions will generate powerful change. These are power, buildings, mobility, industry and agriculture which together generate more than 90% of global emissions. Each of these sectors is capital intensive with substantial fixed assets and long-standing business models. Change will not be quick or easy.

Transition investments or transition finance is the burgeoning investment category that will support high-emitters in their efforts to reduce emissions. This is distinct from climate solution providers which offer the products and services that drive decarbonisation.

This is not a free pass for investors to own high-emitting sectors. Instead, responsible investors must distinguish between companies that have a credible transition plan and those that can’t or will not change sufficiently. Investors need the assurance that these ‘transition investments’ have the capacity to reduce emissions in the long run. To do this, the most appropriate course of action is to adopt a categorisation framework that consistently identifies which assets qualify as transition investments.

The Sustainable Markets Initiative have launched an approach to do this. Its framework places transition assets into one of five categories which allows investors to identify companies that may qualify as Paris-aligned transition candidates. Such a framework can underpin the required growth in transition finance.

The low-carbon transition will have marked macroeconomic effects – notably the potential for higher inflation. One of the benefits to asset owners therefore is that investment in the transition leaders across high-emitting sectors could provide some inflation protection and solid returns as the leading names attract capital at the cost of the laggards.

For transition investing to work, both carbon impact and commercial returns are essential. Rather than disinvesting from heavy emitters we can mitigate carbon emissions by supporting those companies with robust transition plans.

This paper argues that growth in transition investments and transition-related targets will help mitigate disorder, in the process improving our chances of a lasting transition to net zero.

Authors

Tom Nelson
Portfolio Manager
Nazmeera Moola
Chief Sustainability Officer
Annika Brouwer
Sustainability Specialist
Sahil Mahtani
Strategist, Investment Institute

Contributors

Daisy Streatfeild
Matt Christ
Marc Abrahams

General risks. All investments carry the risk of capital loss.

Important Information

This communication is provided for general information only should not be construed as advice.

All the information in is believed to be reliable but may be inaccurate or incomplete. The views are those of the contributor at the time of publication and do not necessary reflect those of Ninety One.

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.

All rights reserved. Issued by Ninety One.