One of the biggest challenges for achieving the Paris agreement is realizing a fair energy transition for developing countries. Think of countries such as Indonesia, Vietnam and India, which depend on coal for their electricity supply. If this current dependence continues, these countries alone will together contribute to total CO2 emissions that add to more than 1.5°C of warming. For this reason, the International Energy Agency (IEA) states that global demand for coal should be reduced to just 10% of its current demand. In addition, the energy generation systems of the countries mentioned must become CO2 neutral before 2040. Countless investments are therefore required for a fair energy transition. The question is, however, who will take responsibility for these investments?
Private parties better at climate promises than deeds
During COP27, Sigrid Kaag, the Dutch minister of Finance bounced the ball to the private financial sector: ‘Ultimately, we will not achieve the financial targets for combating climate change if the private sector and the broader financial playing field do not get involved on a large scale.’ More and more private parties are therefore making promises to contribute to combating climate change. Take, for example, the 291 asset managers with a combined estimated wealth of $63 trillion who have signed the Net Zero Asset Managers Initiative. With this, financial institutions commit (on paper) to contribute to the climate goals set in the Paris agreement. Initiatives such as these are good for getting the noses of the private financial sector in the right direction and serve as a tool to take responsibility for better performance in creating real impact. However, a recent study by the Association of Investors for Sustainable Development (VBDO) shows that in reality, these climate promises do not (yet) directly provide the necessary tidal wave of climate action.
Financial institutions can directly contribute to the energy transition through so-called impact investments, where a positive social or ecological impact is set as the target. Unfortunately, a VBDO study shows that both pension funds and asset managers are lagging behind in making impact investments in renewable energy. Less than half of the 44 largest Dutch pension funds have impact investments in renewable energy. In addition, it appears that only a third of the pension funds invest in regions such as Africa, Asia and Central and South America.
Take responsibility for your own motivation
Both asset owners and asset managers are quick to name reasons why they cannot invest in the energy transition in developing countries. It is never their responsibility. Asset owners are to blame because they only look at risk and return and refer to their fiduciary duty. Asset managers are to blame because they do not offer impact investments in the energy transition in developing countries. Companies are to blame because they don’t want to change. Governments are at fault because they do not facilitate investment opportunities. “We really want to, but we can’t because of others.”
In other words, as long as financial parties continue to shift blame, they have an excuse to do nothing. It’s time each party takes responsibility, which must be expressed in actions, changes in approach and collaborations within and outside the sector. Fortunately, recent VBDO studies also show that the you-bake attitude is (partly) a thing of the past for some parties. For example, there are parties that do make impact investments in the energy transition in developing countries. These parties affirm an intrinsic motivation and do not attribute external causes to their incompetence. They are innovative and dare to actually contribute to a global and fair energy transition.
Choose impact investing
What these financial parties do, is co-invest in the energy transition in developing countries and thus reduce the (often overestimated) risks by making better estimates. Moreover, risks can also be reduced through co-financing: institutional investors, for example, pension funds, can invest in impact funds that then finance projects in the field of renewable energy, sustainable infrastructure, food security or access to finance in developing countries in collaboration with development banks.
To meet the Paris climate goals, the tide must turn now. Impact investments in the energy transition in developing countries play an important role in this, now and in the future. Asset managers need to take responsibility and partner with external organizations to accelerate a fair energy transition. Asset owners must also set clear expectations and demand that asset managers actually take action. This requires courage, pioneering and, above all, cooperation. The climate promises are there, now it’s time to put them into action.
This article was previously published on Financial Investigator.