The rise of transition finance

Asia Pacific highlights

A strong majority of Asia Pacific asset owners (68%) report that fighting climate change is one of their fund’s strategic objectives – a higher proportion than Western Europe (56%) and North America (60%). However, Asia Pacific respondents in our survey recorded the lowest adoption of transition finance (13%) among the featured regions.

Asset owners report that the top barrier to transition finance in Asia Pacific is that expected returns are too low. Indeed, the region has a relatively low proportion (47%) that believe transition finance is a major commercial opportunity for asset owners, when compared to regions like North America (60%) and the UK (56%).

But this is expected to change. More Asia Pacific asset owners say they are likely to make transition finance investments in the next 12 months (43%) than most other regions (only Southern Africa is higher, at 48%). Plus, two thirds believe transition finance will grow rapidly over the next three years. Asset owners in Asia Pacific are clearly committed to climate-related investing and seem to expect to find stronger returns from transition finance in the months ahead.

North America highlights

Fighting climate change is a strategic goal for 60% of North America asset owners, and 52% say that financial institutions have a responsibility to provide investment capital to fund the decarbonization of high emitters. These proportions lag behind asset owners from the UK and Asia Pacific, falling roughly in line with Western Europe.

When it comes to transition finance in particular, only 17% of North America asset owners say they are using it – among the lowest adoption rates in our survey. The main barrier is internal resistance to changing traditional strategies. Given that a relatively high proportion (60%) believe transition finance is a major commercial opportunity for asset owners – higher than the other regions – the motivation to overcome this and other barriers is in place for many.

But transition finance adoption is unlikely to be as fast as other regions, with only 31% North America asset owners likely to invest in it within the next 12 months. However, the medium-term outlook is stronger, with 69% of North America asset owners saying transition finance will grow rapidly over the next three years – the highest among the regions.

Southern Africa highlights

Southern Africa asset owners have a distinct perspective on climate-related investing and transition finance. The other regions in our survey are all developed markets, and in Southern Africa, it is often not suitable or fair to put climate concerns ahead of critical social and economic issues.

This bears out in our survey results, where compared to other regions, significantly lower proportions of Southern Africa asset owners say that fighting climate change is one of their fund’s strategic objectives (37%), and that financial institutions have a responsibility to provide investment capital to fund the decarbonization of high emitters (37%). The same pattern holds in relation to transition finance being viewed as a major commercial opportunity for asset owners, and of its growth prospects, both of which are much lower than other regions.

Nevertheless, 22% of Southern Africa asset owners use transition finance in their funds, which is around the global average, and 48% say it is likely that they will invest in transition finance over the next 12 months – the latter was the highest result of all regions. What might differentiate these investments from those of developed market asset owners is that they may often be designed to make a real impact on more than just the climate, with goals related to, for example, working conditions, community uplift, or infrastructure development.

United Kingdom highlights

UK asset owners are more climate-focused than other regions – 76% say fighting climate change is one of their fund’s strategic objectives – and lead the way on transition finance adoption with 24% using the approach. Part of the reason for this is that UK asset owners do not believe that climate-related investing leads to lower returns (29%) as much as other regions, such as North America (44%) and Southern Africa (52%).

UK asset owners also appear to be driven by more than risk-return profiles, with a higher-than-average proportion (65%) saying that financial institutions have a responsibility to provide investment capital to fund the decarbonisation of high emitters.

They are also more likely to believe that without greater investment in transition finance assets, the world will not be able to meet the Paris Agreement climate-change goals.

The only area of concern for the UK is that transition finance adoption slows down. Of all the regions, the UK has the lowest proportion of asset managers that say they are likely to invest in transition finance in the next 12 months.

The leading barrier for UK asset owners could be part of the reason for this: significantly more than average (38%) say that there are not enough companies with credible, realistic and feasible transition plans. Developing a wider pool of investable transition finance opportunities is therefore a key driver of future transition finance growth.

Western Europe highlights

Western Europe’s asset owners are less likely to have climate change as a strategic objective (56%) for their funds than those in the UK (76%), Asia Pacific (68%), and North America (60%). More than half (54%) say their fund is not focused on any goal beyond the risk and return performance of their assets, while 39% say their organisation believes climate-related investing leads to lower returns (both of which are close to the global average).

Transition finance is in use by one-in-five asset owners in Western Europe in our survey, with 32% expecting to make such investments in the next 12 months. Far higher proportions say that transition finance is a major commercial opportunity for asset owners (54%), and that transition finance will grow rapidly over the next three years (60%), which suggests that the segment will expand over the medium term.

Difficulty measuring or quantifying company progress in climate strategy/projects is the chief barrier to further investment in transition finance for asset owners in Western Europe – which is among the leading barriers for asset owners around the world. Encouragingly, the third highest barrier globally – internal resistance to changing traditional strategies – is among the very lowest for asset owners in Western Europe. This suggests an openness and agility which could see the region adopt transition finance quite swiftly over the coming years.