29 June 2023. The world needs to invest over US$4 trillion a year by 2030 if we are to reach net zero emissions by 20501. Of that, US$1 trillion is needed for the energy transition in emerging markets and developing countries2. For the transition to net-zero carbon, global investors need to finance swathes of new infrastructure and industrial change among companies that produce the highest emissions today but have credible transition plans. Emerging market companies are at the heart of this transition finance opportunity.
Nazmeera Moola, Chief Sustainability Officer, Ninety One: “The battle for net zero is going to be won or lost in the emerging market corporate sector because that is where the investment is needed. By providing finance to these companies – at commercial rates – investors can tap into this long-term investment theme and make a real-world contribution to the global energy transition.”
EM economies already account for over 60% of today’s emissions but are on a trajectory to represent more than 90% of emissions growth by 20303. While EM government commitments to the transition to net zero vary and many lack ambition, plenty of EM companies are seeing this as a business imperative and a way to create a durable, competitive advantage:
Annika Brouwer, Sustainability Specialist, Ninety One: “Many EM companies are ahead of legislation or government action and are looking to build low-risk business models.”
The field of transition finance is broad. As part of the Asset Manager Asset Owner Task Force at the Sustainable Markets Initiative, Ninety One helped to develop a Transition Categorisation Framework approach across five categories. Among the three core groups, first are green investments that need to be made, new infrastructure, the new technologies; second is decarbonisation investment in high emitters that have a transition plan; and the third is investment in the enablers to the transition in other sectors. The last two relate to interim phase-outs and companies/sectors that are aiming to transition, but yet to establish a transition plan.
Moola continued: “Among both high emitters and solution providers, we already find that many companies are looking to use debt to finance the climate-oriented evolution of their businesses. Companies in this space are often competing in global markets and rely on financing solutions both from traditional channels (e.g., banks) and, increasingly, through public and private credit markets – especially as regional and local banks face more limited balance sheet capacity. We believe that debt will be the work horse of transition finance.”
Furthermore, there is a role for both public and private debt markets here. While the heavy emitters are large existing companies and tend to rely on public markets to finance their transition, the development of the technologies of tomorrow that will move the world’s economies closer to net zero is largely happening in the private sector and outside of public debt markets. Because the technology does not yet exist to enable the five critical industries that represent over 85% of global emissions (power, industry, transport, agriculture, buildings) to reach net zero, investors should also lend to smaller innovating companies that can help avoid carbon in the medium term.
Brouwer concluded: “While transition finance represents a long-term opportunity for investors, there is a significant potential benefit in being an early mover. Early investors can seek to benefit from credit spread compression stemming from cash flow growth and from improving credit quality as this field of investment moves to the mainstream and as companies that fail to transition are penalised as transition risk is increasingly priced. This has the potential to provide them with competitive returns with tangible climate benefits.”
1IEA, World Energy Outlook 2022, https://www.iea.org/reports/world-energy-outlook-2022
2IEA, World Energy Outlook 2022, https://www.iea.org/reports/world-energy-outlook-2022
3Our world in data based on the Global Carbon Project. This measures C02 emissions from fossil fuels and cement production only – land use change is not included. Statistical difference (included in the GCP dataset) are not included here.