Global corporates are also playing a leading role in countries achieving their NDCs.
The Ninety One emerging markets corporate debt team manages $10 billion and typically lends money to 150 to 200 emerging markets companies across 40 countries. We see real ambitions to transition being put into practice in India through the current buildout of renewables infrastructure. For example, Greenko Group, which has been building out renewables for some time, is now expanding into pumped hydro storage and green hydrogen, which is needed to progress the renewables baseload and help the industrial sector abate carbon.
In South Africa, the mining company Anglo American plans to build out up to 4GW of renewable energy by 2040; alone, it could generate roughly 7% of the country's demand.
The bulk of the investment needed for the transition in middle-income countries will be for renewable energy and grid infrastructure, and could be financed at commercial rates with attractive risk-adjusted return potential for investors. Much of it will be funded through transition-related project or corporate debt financing. It is an underappreciated fact that emerging markets corporate debt has delivered the best risk-adjusted returns across fixed-income asset classes over the past 10 years. It's a catalytic asset class that can deliver both impact and return.
Though the average developed-market pension fund will have an allocation to emerging markets equities and/or sovereign debt, virtually none have an allocation to emerging markets corporate debt. As a result, while these markets' pension funds speak eagerly about supporting the emerging markets energy transition, their credit specialists and advisors who are typically unfamiliar with emerging markets corporate debt tend to balk.
There will be no real-world emissions reduction unless we move beyond talk.
The World Bank Group and other development finance institutions need to proactively work with developed-market asset owners/pension funds to crowd-in the necessary investment flows. While risk mitigation is not necessary to enhance risk-adjusted return potential in private-sector investments in middle-income countries, it would incentivize asset owners and their consultants to take the first step. Proof points are the best way to narrow the gap between perceived and realized risks in the short term. This would spin the flywheel of growth of the emerging markets energy transition asset class over the medium term.
Unfortunately, neither MDBs nor the majority of pension funds seem to think they have a role to play in funding the energy transition in middle-income markets. Unless both change their stance, the world faces a catastrophe.
Adam Matthews is the London-based chief responsible investment officer at Church of England Pensions Board, and Nazmeera Moola is the chief sustainability officer at Ninety One in Cape Town, South Africa. This content represents the views of the authors. It was submitted and edited under Pensions & Investments guidelines but is not a product of P&I's editorial team.