Ahead of his COP27 Finance Day Glasgow Financial Alliance for Net Zero (GFANZ) panel on mobilising capital today, Ninety One founder and CEO Hendrik du Toit says finance must follow the carbon to ensure a lasting transition to net zero.
There is only one way to ensure an inclusive and effective transition to net zero. By providing the financial means. We must finance the reduction of carbon by directing capital to high-emitting regions and sectors where real-world change is most needed.
This will achieve not just impact but will also offer investors an appropriate return.
We can’t allow greenwashing or divisive politics to stymie the effort. The worst mistake would be to isolate carbon-heavy places and enterprises by starving them of capital. Stepping back simply exacerbates the problem. Divestment may feel virtuous. But it would be ruinous.
The UN says incremental change is no longer an option. The urgency to find a path to net zero is greater than ever. Heavy emitters cannot decarbonise alone. Investment will be the inducement. Importantly, the condition of finance is for investees to show they will achieve a timely net zero.
At least two different types of finance are essential. Investment in the high-emitting sectors — power, buildings, mobility, and industry – that are responsible for about 85% of global emissions. And then, also, in infrastructure that builds toward a net zero future and companies finding ways to control, reduce, and capture carbon.
According to the Sustainable Markets Initiative Transition Finance Working Group, the world’s economy requires approximately $4 trillion a year to reach net zero by 2050. Emerging markets need about 25% of this investment. Though they are responsible for only one-seventh of legacy emissions per capita, they are set for 90% of global-emission increases by 2030. Emerging markets have historically contributed least to the problem but are suffering the most.
Only 15% of the necessary finance has been made available. The time to mobilise capital at scale is now. GFANZ, whose members represent about $130 trillion of AUM, estimates private actors could provide 70% of the financing. The market and asset owner scrutiny would direct capital to where it is most needed while earning an appropriate return.
Ninety One’s independently conducted The rise of transition finance research found 60% of asset owners say fighting climate change is a strategic objective. While only 16% say their fund invests in transition-finance assets in emerging markets, there is conviction among this group, with 86% saying expansion of such finance is a priority. The research showed that 56% of asset owners believe that without greater investment in transition-finance assets, the world will not be able to meet climate-change goals.