As investors and the companies they invest in work towards net-zero goals, they need to look beyond "pure green" strategies to transition-related investments, where debt will play a larger role, active manager Ninety One argues in a white paper released Wednesday.
"Forward-looking investors are funding the new technology, and that's really important," said Nazmeera Moola, chief sustainability officer for Ninety One in an interview. "What you are starting to see now are more difficult conversations."
With five sectors responsible for more than 90% of global emissions and essential for economic growth — power, buildings, mobility, industry, and agriculture — disruption to their output will significantly impact the global economy, and could risk a disorderly transition to net-zero, the paper cautions.
The asset manager is "being very clear about what we want to see" from each company in those sectors and investing in solutions providers, "but you can't have the transition without addressing the commodities involved," said Ms. Moola, whose firm has £132.3 billion ($159.5 billion) under management.
"Public companies account for the vast majority of the world's emissions, forming an important transition universe for equity and debt," the paper said. "We expect transition debt to form the backbone of new capital to fund transition plans. The lower cost and flexibility of debt markets support innovation and, crucially, the ability to link lending to transition-related goals and targets. Debt will also be the most effective tool to mobilize private capital from wealthy nations towards emerging markets, where the bulk of emissions growth needs to be addressed," the paper says.
Another issue is the lack of a common understanding of what qualifies as a transition, and it will be important to have more data on transition plans and implementation, she said. As the investment industry learns to assess transition plans, "we expect asset owners to become increasingly comfortable with adopting transition-based climate strategies. The highest-emitting companies and industries require investors who can own them, challenge them on the credibility of their plans, and hold them to account over time, as they evolve," Ms. Moola said.