Delivering sustainability with substance

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.