Nazmeera Moola, chief sustainability officer at Ninety One, specialises in ensuring a just and inclusive net-zero transition. She shares recent progress on the firm’s Emerging Africa Infrastructure fund (EAIF), which provides debt financing for infrastructure projects across Africa, and her message for investors who are wary of investing in emerging markets from a sustainable perspective.
Emerging markets are essential in the climate transition but are starved of the capital to fund it. How can EMs get the investment they need for the net-zero transition?
Ninety One have developed a sustainable strategy that we have been investing in for around three years. It is important to assess changes in government policy around environment, ESG factors when directing investment flows to emerging markets.
Our strategy has done well. If you look at the structure of financing for the transition, by 2030, we should be spending around $1trn (£791bn), according to International Energy Agency (IEA) data. Currently, it is around $150bn (£119bn) a year. Around $18mn (£12m) is spent on domestic sources, which is around half government funding and half private.
Governments have an important role to play. The private sector, particularly in middle income markets, are making lots of investments. What I’ve seen is room to support governance in the space. For example, governments like Chile and Uruguay are implementing specific sustainability linked issuance, which they link to one to the NDCs and the other to deforestation and decarbonisation targets.
Many companies and portfolio managers are bringing projects to market, such as building up the new renewable technologies or investing in companies that are decarbonising their operations as part of transition.
Are you seeing progress in the emerging markets space? Are there enough investors supporting this space? Are there any other barriers that deter flows of investment?
For most investors, their perception of risk in emerging markets is quite high. On the one hand, many investors are comfortable investing in emerging market equities because they benchmark against the All Country World Index. There is a reasonably high degree of comfort because in sovereign debts you have the Poor Country World Index they can track.
The least familiarity is in credit, this being in corporate debts or project debt where a lot of the transition going to be financed. A lot of the transition is about rectification projects, project debts, and lot of corporates are doing a lot of activity in corporate credit. Yet, this is where most DM asset owners have very little experience.
Also, the perception of risk is much higher than realised risk. I tell investors two things. Firstly, look at the actual data and the actual default rates. These can be accessed through the Moody’s database or the World Bank. The multilaterals recently released historical data in terms of the GEMS database, and the default rates are much lower than anyone would expect. Realised risk is much lower than perceived risk.
Also, investing in EMS is much less risky than equity investments. If you are comfortable investing in EM equities, it should not be difficult to look at credit.
Where are the challenges and opportunities in the emerging markets space?
The risk-adjusted return is attractive. The returns are not super high, but when you think about what you are investing in – whether that is infrastructure projects or high quality formulas – this pays off.
However, the risk adjusted return becomes less attractive if you have a very high perception of risk. If you look at what the default rates and the loss rates have been in the space, then the returns are quite attractive.
Most investors will tell you they can’t sacrifice return for impacts. Yet, no one is asking you to sacrifice return. Investors must be thinking about what the real risks are.
Are there any updates on the Emerging Africa Infrastructure fund?
The fund continues to deploy into a range of interesting projects and developing pipelines in Southeast Asia because its mandates been extended into that region. This is becoming an area which we will be focusing on.
There has also been an interesting diversification in the projects the fund supports, such as the electric bus project in West Africa. The fund has committed $50mn (£39mn) to launch Africa’s first fully electric public bus network in Senegal’s capital, Dakar. The network is an example of the future of decarbonised urban mobility to countries seeking to implement climate-smart mobility solutions.
The Dakar Bus Rapid Transit (BRT) establishes a new benchmark for sustainable public transport in Africa. The aim of the project is to reduce emissions, ease traffic congestion and improve road safety. The project will include 121 buses operating across 13 municipalities and an 18.3km route, which will eventually carry 300,000 passengers daily between the suburbs and city. The bus network will reduce travel times by 50 minutes and avoid 59,000 tonnes of CO2 emissions annually, in line with the PIDG ambition to achieve the UN’s Sustainable Development Goal 13 on Climate Action.
What is your future outlook? Do you think more investors should be supporting emerging markets in the net-zero transition?
We are looking at our alignment with the proportion of SEMs across the firm that we have with Science Based Paris aligned plans.
It is less about annual emissions reductions in the funds, because we think there’s a massive disjoint between real world emissions and financed emissions. You can decarbonise your portfolio, but that doesn’t achieve much. It depends on the targets. In terms of contribution, looking at our transition assessment and alignment framework, if we can invest more capital to raise more funds, this could be a fantastic contribution to get more projects up and running in the space.
