Ninety One’s Hendrik du Toit: Net Zero is a pipe dream without total inclusion

Ahead of his panel session at the Green Horizon Summit at COP26, du Toit contends that ‘portfolio purity’ does not effect the kind of change needed to tackle the climate crisis.

3 Nov 2021

Ahead of his panel session at the Green Horizon Summit at COP26, du Toit contends that ‘portfolio purity’ does not effect the kind of change needed to tackle the climate crisis.

3 November 2021, Hong Kong/ Singapore - Cop26 is now upon us, and we must acknowledge an incontrovertible and sobering fact about the drive to net zero. Any effort that doesn’t work for the whole world will fail everywhere. A path that favours developed markets at the expense of others will lead to a partial net zero, which is no net zero at all. Given our South African roots, we understand this need perhaps better than most. Too many countries, companies, and capital allocators (asset managers and asset owners) see achieving this goal by mid-century as a divided race against metrics rather than as a united race against time.

Now is the time to align and accelerate global efforts to do right by the planet. We must put an end to buzzwords, greenwashing, marketing gimmicks, and gaming the system. We have a duty to create a practical agreement regarding a fair transition path for all of the world’s 7.9 billion people, most of whom live in emerging markets and are disproportionally exposed, depending on dirty energy sources or industries for a long time, even indefinitely, without inducements and support.

The challenge is that many investors are focused merely on a reduction of their own reported carbon emissions – or on reducing “portfolio carbon.” By myopically focussing on “portfolio purity” and picking and choosing investments that make them look green without having to advocate for real-world carbon reduction, they aren’t effecting the kind of change needed to tackle the climate crisis. All they are doing is creating discrete so-called clean portfolios. They are leaving the problem of heavy emitters to others, perhaps even to bad owners. By way of example, in a typical global equity portfolio, a reduction of 50 percent exposure in the BRICS plus Indonesia will lead to a 3 percent reduction in reported portfolio carbon intensity. The weight of those countries in the index is just 8 percent, another reason divestment may be more attractive than engagement. This gives institutional investors an incentive to divest and avoid these markets. Our experience in emerging markets tells us a very different approach is required.

To divest is irresponsible and simply demonstrates a lack of either understanding, or transparency regarding the climate crisis. Divestment does not deal with the climate crisis. It simply exacerbates it. While emerging markets are today responsible for more than two-thirds of annual global emissions, OECD member countries are responsible for three-fifths of cumulative historic emissions. That’s seven times more than the rest of the world on a per capita basis. Now is not the time for rich countries, their investors, asset owners, and institutions to abandon the rest. If an effective “buy developed, sell developing” takes hold, emerging markets may be starved of investment capital at the very time they need an extra $2.5 trillion a year to finance their energy transitions.

We must focus on long-term transition plans consistent with net zero by 2050 for companies and countries, not near-term reductions. From asset owners, we must demand clear transition plans. This requires patient pragmatism rather than instant purity – or a focus on “transition finance” instead of on “net zero finance.” Moreover, we must give due consideration to the context in which each country operates, its potential to contribute to the world’s collective net-zero ambition, and its specific transition pathway.

Furthermore, asset allocators should commit capital to transition finance -- both in dedicated allocations and the way they measure and monitor progress against climate goals in core portfolios. Additionally, asset managers must develop suitable vehicles with the integrity and framework to provide comfort that commitments to transition are not greenwashing.

It is imperative to create financial instruments that help capital allocators align portfolios with a real-world, inclusive decarbonisation, i.e. instruments that channel capital to companies and projects that move the global economy closer to carbon neutrality and that enable poorer nations the opportunity to participate in the net-zero transition.

Where to focus: Electricity

Many emerging markets, including India, South Africa and Indonesia, still rely heavily on coal for electricity production, with fossil fuel accounting for 25-40% of total carbon emissions. Transport accounts for a further 9-18%. Since electric vehicles need a clean energy grid to deliver the benefit, by cutting emissions from electricity production it is possible to tackle 40-50% of total emissions in many emerging markets.

Four major funding streams need to be developed to clean up electricity generation in the developing world:

  1. Available capital must be scaled up for renewable energy roll-out.
  2. Sizeable investment needs to be directed towards expanding transmission infrastructure.
  3. Incentives for state utilities to accelerate the closure of high-emitting plants.
  4. Funding for a fair transition for employees and communities at risk from removing reliance on fossil fuels.

The private sector must drive the early momentum of the intended transition and provide green finance at scale. For governments, policy makers and capital allocators, this is the longer path to take. It is also the right path. With a fair and inclusive transition, the whole world wins.

Hendrik du Toit, Founder & Chief Executive of Ninety One, will be speaking in a panel session on ‘Mobilising private capital in emerging markets’ at the Green Horizon Summit during Cop26 at 3.15PM today. To view this via live stream, please click here to register.

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