Institutional investors need to be driving capital flows towards emerging markets (EM) credit for the transition to net zero to be successful, according to the sustainability team at Ninety One.
Nazmeera Moola, chief sustainability officer, and Annika Brouwer, sustainability specialist, spoke at a recent event about the lack of investments directed towards this asset class despite it being imperative to the decarbonisation of EM economies.
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“Funding the EM transition needs to move from words to action,” said Moola. She highlighted EM economies account for over 60% of today’s emissions but are on a trajectory to represent more than 90% of emissions growth by 2030.
“We need to be spending $1trn a year to achieve net zero by 2030 in EMs but it’s currently only around $50bn and very little of that is coming from the private market.”
She added this issue was brought to the fore with the Paris Agreement and gained momentum with COP26 and 27. However, we are still far behind in terms of the capital needed.
“Institutional investors in developed markets have very little familiarity with EM credit but huge parts of this transition will be funded by debt and debt to corporates.
“Most emerging market investors’ allocation is in equities. EM credit has a tiny following.”
Investors could flag opaqueness, higher risks and high polluting sectors as reasons to avoid this asset class but there are significant opportunities, the pair said.
“EM credit in the listed space provides one of the best Sharpe ratios but that is not well understood,” said Moola.
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Brouwer added: “There are a lot of ‘dirty’ sectors such as steel, cement and power in EMs but if we don’t decarbonise these sectors, we will not achieve our net-zero targets.
“These are really the starting points for us and will have the highest impact.”
As part of the Asset Manager Asset Owner Task Force at the Sustainable Markets Initiative, Ninety One helped to develop a Transition Categorisation Framework breaking down companies to sit into five categories. The proposed classification of transition investments are:
- Transitioning/Mitigating
- Committed to Transition
- Transition Enabler
- Interim to Phase-Out
- Aiming to Transition
“This ensures credibility and avoids greenwashing,” said Brouwer.
They added companies are being increasingly open as they want to see capital flowing to help them decarbonise and in many cases the companies are well ahead of their country’s policy around net zero.
That said, they are seeing encouraging signs with Chile and Uruguay recently issuing sustainability linked bonds and India making progress in the renewable sector.
