Deliberating EM debt: sustainability

EM sovereign emissions measurement: a different perspective

Common approaches among asset allocators risk preventing progress towards net zero and missing out on a structural investment theme

Nov 2, 2023

5 minutes

Peter Eerdmans
Roger Mark
Vivienne Taberer

The problem with portfolio-level emissions targets

The increased focus on global net-zero goals seen among asset allocators in recent years is encouraging. Yet current approaches are often worrisome. As we discussed in our paper on an inclusive transition, many asset allocators apply crude measures in pursuit of an optically lower carbon ‘footprint’ for their portfolios. Such portfolio-level carbon targets can work against net-zero goals by reducing capital allocations to emerging markets (EMs), which are vital to the global transition.

It is understandable how EMs have become an easy target. Economic development has gone hand-in-hand with rising emissions, with carbon intensity1 historically being strongly correlated to growth rates. This, coupled with offshoring of heavy emitting industry from developed markets (DMs) to EMs, mean EM economies (including China) account for c.70% of global emissions today. So the ‘portfolio decarbonisation’ approach to net zero has naturally led to some EM allocations being slashed. This is problematic – it is likely to deprive EMs of the funding they need to transition, in turn making it harder for the world economy to shift to a ‘decarbonised’ model, given the global importance of EMs – as outlined below. For investors, it also risks missing out on a once-in-a-generation structural investment opportunity, which is centred in EM.

EMs are central to global net-zero goals and a structural investment theme

Given more than 90% of emissions growth is projected to come from EMs, EMs will determine the world’s ability to reach net zero. As it stands, a major shift will need to take place in financial markets. Today, 80% of global financial assets are in developed countries but 70% of the capital required to meet the Sustainable Development Goals and Paris Agreement targets needs to go to developing countries. An efficient transition requires more, not less, investment into EMs. Engagement is also essential in helping influence change.

Location of global financial assets | Location of sustainable spending needs

Source OECD, Morningstar, Credit Suisse Research, February 2021.

It follows that the global investment community, in seeking to align with global net-zero goals, must embrace EMs if investment is to make a real-world impact on the energy transition. And it is in EMs where investors can already find compelling transition-related investment opportunities.

We believe investments in renewable energy in EMs have the potential to provide attractive and stable returns. In addition, transitioning away from fossil fuels should help put EMs’ finances on a more sustainable path – one that is less reliant on international fossil fuel markets; this should also support the return potential of their debt markets.

The shortcomings of sovereign-level carbon emissions metrics

Issues around measuring sovereign emissions also contribute to the current conundrum whereby many asset allocation decisions are inadvertently working against the pursuit of an effective and inclusive transition to net zero. The Common But Differentiated Responsibilities principle was formalised at the Earth Summit in Rio de Janeiro in 1992 and was a critical component of the Paris Agreement. In this vein, although EMs’ share of current carbon emissions is high, DMs have been responsible for the largest share of historical emissions, owing to earlier industrialisation of their economies. Furthermore, a key reason why emissions have declined in the West is because multinationals have relocated production (and emissions) to the East. Yet carbon emissions per unit of GDP - today the principal intensity metric used among sovereign debt investors – takes no account of any of these trends.2

An alternative – and complimentary measurement approach to emissions/GDP – is to consider emissions per capita. Although this is a fairer approach for EMs, like all prevailing carbon measures it only provides a partial, backward-looking perspective. A meaningful assessment of sovereigns in relation to the net-zero transition needs to take a forward-looking perspective that covers a broad range of areas that affect that transition, from concrete policy commitments to renewable energy capacity building. Carbon matters, of course, but current emissions – however they are measured – only tell one part of the story.

A more meaningful approach to assessing net zero risks and opportunities

We believe a more meaningful way to assess sovereign debt issuers through a net-zero lens is to consider how they are progressing in terms of a realistic and fair ‘pathway’ to net zero. This pathway should take account of a country’s wealth and social standards, and partly account for historic responsibility for the climate crisis – only then can investors ensure the energy transition is fair and inclusive. While this will mean steeper pathways to net zero for DMs – requiring them to decarbonise their economies more quickly – it will allow EMs more time to adjust, ensuring they can balance growth and social development goals with climate goals. Given the absence of an existing framework assessing all countries we invest in, we developed our Net Zero Sovereign Index in 2021. Covering 115 emerging and developed nations, the index provides sovereign debt investors with an independent, objective, quantitative assessment against which to measure and assess emerging markets. It provides a deeper analysis of a country’s climate performance than simple metrics like carbon intensity, and includes transition-pathway measurements, incorporating key indicators to assess the level and trend across emissions, energy use and renewables.

Countries (DM and EM) viewed through various lenses

Country Emissions Per Capita Emissions per Unit GDP Emissions per Unit GDP PPP Adjusted Emissions Per Unit of Debt Ninety One Net Zero Sovereign Index ranking*
Australia 108 26 72 32 98
Brazil 53 55 64 39 12
Canada 105 28 70 20 94
Chile 50 32 36 49 50
China 92 69 95 52 90
Costa Rica 34 22 18 24 2
Egypt 33 65 43 50 35
El Salvador 18 38 34 30 6
India 21 85 60 63 45
Indonesia 35 64 49 79 80
Poland 97 53 52 62 91
South Africa 77 95 99 77 87
USA 107 19 53 12 99

Source: World Bank data, Ninety One calculations, September 2023. *Rank out of 115 countries (lower is better).

In developing the net-zero pathways component of the Index, we put significant emphasis on fairness, drawing on the work of the Climate Equity Reference Project - taking national income levels and historical emissions (since 1990) into account. More responsibility is given to richer countries and those that have emitted more historically, with the pathways for the poorest countries allowing scope for necessary industrialisation.

While an important metric on its own, the Net Zero Sovereign Index also supports our strategic climate engagements with governments.

On the right path

One of the challenges in constructing the Index was compiling sufficiently robust policy assessments. This work is crucial as it makes the Index forward-looking - incorporating how a country’s energy mix may change over time, and if it can feasibly deliver on its committed Nationally Determined Contributions.

Through this lens, Chile is a good example of a country that was one of the highest emitting countries but has put robust and ambitious legislation around renewable energy in place – it is on a credible transition pathway. Chile targets reaching net zero by 2050. It has a strategy aligned to its renewable energy goals (60% by 2035; 70% by 2050). It is well positioned to continue to develop green hydrogen and signed a memorandum of understanding with the EU to finance projects in the country. Implementation of Chile's 2050 Energy Strategy would mean emissions could peak in 2023 – two years earlier than planned.

Over recent years, the Net Zero Sovereign Index has been a useful tool in our engagements with Chile. It has helped inform various discussions on topics such as the country’s coal phase-out, plans to tackle relatively high energy intensity stemming from the mining activity, and the development of green hydrogen.

Over time, we expect the Net Zero Sovereign Index to be superseded by industry-wide benchmarks that follow similar principles. A key example of a useful external formalisation of our work on the Net Zero Sovereign Index is the ASCOR Project, in which Ninety One participates - this is building on the assessment approach that underpins the Index. Aligning industry around more effective measures of transition is a positive step. Also, crucially, using a methodology that builds fairness into its net-zero assessments will enable investors to construct Paris-aligned portfolios that adhere to the principles of Common But Differentiated Responsibilities for taking climate action.

Net Zero Sovereign Index case study, Kenya

Kenya scores exceptionally well in the Net Zero Sovereign Index.

Its share of renewable energy has increased significantly in recent years, giving Kenya favourable trend and utilisation scores. In 2008, Kenya launched its Vision 2030 plan, a long-term plan to boost industry and infrastructure, to improve Kenyans’ quality of life while adhering to environmental protection norms. Its speedy implementation has been at the heart of Kenya’s successful energy transformation, turning the country into a regional green powerhouse, while accelerating electrification nationwide.

At COP27, Kenya’s then President, Uhuru Kenyatta, reported that renewables account for 90% of electricity needs and 74% of all energy needs. Experts concur that the country is on track to be 100% renewable by 2030.

Kenya’s renewable energy comes from a mix of geothermal, hydropower, wind and solar. According to the World Bank, Kenya’s adoption of solar doubled between 2020 and 2022, making it one of the most active markets for photovoltaic modules. The Kenyan government has also made progress in reducing reliance on hydro energy.

Renewable energy remains a focus area for attracting investment into Kenya and we have seen initial signs of success, with Kenya one of the few countries to develop geothermal energy.

Kenya significantly outperforms peers on most climate action indicators, including carbon emissions.

Net Zero Sovereign Index - Kenya

Net Zero Sovereign Index - Kenya

Source: Ninety One, September 2023.


While carbon emissions are important, a narrow focus on these among sovereigns risks unfairly penalising EMs and missing out on a structural investment opportunity. Various carbon measures exist but they are generally backward looking. A more meaningful approach to assessing sovereigns through the lens of global net-zero goals is a forward-looking approach that assesses whether countries are heading in the right direction relative to a fair and realistic pathway to net-zero. The Net Zero Sovereign Index is a first step towards this and provides a useful engagement tool. Successfully implementing this approach should also help investors to pursue attractive returns by committing capital to countries and corporates that have credible net-zero goals.

1 Emissions/revenue: CO2e/US$ million of revenue. ‘e’ stands for equivalent.
2 This is perhaps an argument for ‘consumption-based’ calculations, where carbon emissions generated for products created in EMs but consumed in DMs are attributed to the relevant DM. However, consumption emissions cannot currently be reliably calculated to enable a fairer metric – the production approach is today more comprehensive and more accurately measured, albeit a regressive measure – making emerging market emissions appear worse given the globalisation of supply chains.

General risks. The value of investments, and any income generated from them, can fall as well as rise. Past performance is not a reliable indicator of future results. Environmental, social or governance related risk events or factors, if they occur, could cause a negative impact on the value of investments.

Specific risks. Emerging market (inc. China): These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems.

Authored by

Peter Eerdmans
Roger Mark
Vivienne Taberer

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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.

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