2022 Investment Views: Sustainability

Delivering sustainability with substance

Getting to net zero will require the whole world to decarbonise, including emerging markets. That demands engaged investors who are prepared to finance the developing world’s transition.

23 Nov 2021

3 minutes

Nazmeera Moola

The fast view

  • Through advocacy and its investments, Ninety One will continue working for a fair and inclusive net-zero transition.
  • This includes seeking to ensure that emerging markets are given the support, time and resources they need to decarbonise.
  • Rather than divesting, we are committed to partnering with high-emitting countries and companies to ensure they have credible transition plans.
  • By sector, decarbonising the energy system must be prioritised, which will require funding for both industrial and social transitions.
Q Ninety One’s purpose is to ‘invest for a better tomorrow’. What are your sustainability priorities for 2022?

We will continue working for a fair and inclusive net-zero transition. From an advocacy perspective, that means making the case for emerging markets to receive the support, time and resources they need to transition successfully. From an investment perspective, we will remain focused on funding solution-providers that are enabling the transition to a low-carbon economy in both developed and emerging markets and funding the transition directly in emerging markets.

Q As an asset manager, how are you tackling the net-zero challenge?

We believe strongly that divesting from heavy emitters won’t get the world to net zero. So, we are committed to working with high-emitting countries and companies to ensure they have credible transition plans. As investors, we think the biggest positive impact we can make is to support real-world emissions reductions, rather than simply creating ‘low-carbon portfolios’.

Q How can the investment community assist a net-zero transition for emerging markets?*

The first step is for investors to recognise that emerging and developed markets will necessarily decarbonise at different speeds, and to develop approaches to measuring net-zero alignment that reflect this. On average, the world needs to reduce emissions by about 7-8% per annum. But whereas developed markets need to cut their carbon emissions by 50% by 2030, for many emerging markets that figure is lower than 30% under a realistic and fair decarbonisation scenario.

The second step is for asset owners and managers to focus not on reducing their portfolio-level carbon footprints, but on financing solutions that generate real-world reductions in emissions. Finally, we need innovative financial instruments that will help to channel the very substantial amount of capital required to fund emerging markets’ transition.

*For an in-depth discussion on this topic, see our paper ‘No one left behind

Q By sector, where does climate finance need to be directed?

The energy sector accounts for 30-45% of global emissions, so this is a major focus for us. Add in transport, and that’s about 60% of emissions – but of course the primary solution for decarbonising transport is to switch to electric vehicles, which brings us back to decarbonising energy.

For countries with coal-heavy energy systems like South Africa, Vietnam, the Philippines and Indonesia, we look to finance four areas. The first is clean-energy infrastructure, such as solar and wind farms, batteries and so on. The private sector can generally be relied on to finance this. The second area, which is often overlooked, is upgrading the electricity grid to integrate renewables and meet the new demands that will be placed on it, such as vehicle-charging. Again, on the whole this can be financed privately.

The final areas require more creative financing solutions. The third one is providing adequate funding so that communities that currently depend on heavy-emitting industries – such as those in coal-mining towns, for example – are not negatively impacted by the shift to cleaner energy. And the fourth is to incentivise utilities to retire coal plants earlier than they might on a purely economic basis. I think we need to establish new financial mechanisms for the latter in particular.

Q Why is it so important that emerging markets transition to net zero?

Emerging markets currently produce 50% of global emissions, though they account for less than 25% of the stock of emissions in the atmosphere. But by 2030, their share of total emissions is going to be 90%. So, if the developed world doesn’t help to tackle emerging markets’ emissions, even if it achieves net zero itself, it is going to face severe climate impacts.

Q In 2021, Ninety One established a bespoke climate-risk learning programme for its investment teams, in partnership with Imperial College. What’s the purpose of the course?

It is clear that climate change, and the world’s response to it, is going to have a major influence on asset values and investment outcomes. So, we want our investment teams to continue developing their knowledge of climate risks and opportunities, and crucially to be able to apply this expertise in their portfolios for the benefit of our clients.

It is increasingly important that investors can evaluate and model both physical climate risks – such as those arising from more frequent extreme weather events, and from longer-term climatic shifts – as well as transition risks. The latter – which are the potential impacts on asset values arising from changes in regulation or consumption patterns due to the world’s response to climate change – are the more immediate risks. We have seen some dramatic price moves already linked to transition risks. For example, the average valuation multiple on coal companies has declined four-fold in the last decade.

Investors need to understand which sectors are most exposed to these climate risks, and to be able to price them. Our work with Imperial has been very helpful in developing our skillset in this area.

Authored by

Nazmeera Moola
Chief Sustainability Officer

Important Information

The information may discuss general market activity or industry trends and is not intended to be relied upon as a forecast, research or investment advice. The economic and market views presented herein reflect Ninety One’s judgment as at the date shown and are subject to change without notice. There is no guarantee that views and opinions expressed will be correct and may not reflect those of Ninety One as a whole, different views may be expressed based on different investment objectives. Although we believe any information obtained from external sources to be reliable, we have not independently verified it, and we cannot guarantee its accuracy or completeness. Ninety One’s internal data may not be audited. Ninety One does not provide legal or tax advice. Prospective investors should consult their tax advisors before making tax-related investment decisions.

This communication is provided for general information only and is not an invitation to make an investment nor does it constitute an offer for sale. Investment involves risks. This is not a recommendation to buy, sell or hold a particular security. No representation is being made that any investment will or is likely to achieve profits or losses similar to those achieved in the past, or that significant losses will be avoided. The securities or investment products mentioned in this document may not have been registered in any jurisdiction.

This communication may include hyperlinks which lead to websites published or operated by third parties. Providing the hyperlink does not imply any affiliation, sponsorship, endorsement, approval, verification or monitoring of any information contained in the third party websites. Ninety One has not reviewed any third party websites for accuracy or completeness and is not in any way responsible for the content of any third party websites. Using or following the hyperlinks is at your own risk.

In Singapore, this communication is issued by Ninety One Singapore Pte Limited (company registration number: 201220398M) and has not been reviewed by the Monetary Authority of Singapore.

Except as otherwise authorised, this information may not be shown, copied, transmitted, or otherwise given to any third party without Ninety One’s prior written consent. © 2021 Ninety One. All rights reserved.

Past performance shown are not indicative of future performance. Investors are reminded that investment involves risk. Investors should read the prospectus and product highlights sheets of the funds which are available from ninetyone.com/en/singapore or any of the appointed distributors before making any investment decision. Please contact your financial advisor if you are in doubt of any information contained in this website. The value of the shares in the fund and the income accruing to the units, if any, may fall or rise.

By clicking on the hyperlink of Investor relations below, you are leaving this website with information specific for retail investors in Singapore and entering the global website.

Please note that the global website is not intended to target investors in Singapore. It has not been reviewed by the Monetary Authority of Singapore (“MAS”). The website may contain information on funds and other investments products that are not authorised or recognised by the MAS and therefore are not available to retail investors in Singapore. The prospectus and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the shares of these funds and/or other investment products may not be circulated or distributed, nor may such shares be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore. The website may also contain information on investment services / strategies that are purported to be carried out by an Ninety One group company outside of Singapore.

Any product documents and information contained in this website are for reference only and for those persons or entities in any jurisdictions or country where the information and use thereof is not contrary to local law or regulation.

This website has not been reviewed by the Monetary Authority of Singapore. Issued by Ninety One Singapore Pte Limited (Co. Reg. No. 201220398M).