By Godwin Anyebe
The devastating impact humanity is having on the planet is quickly passing the point of no return, and if decisive and quick action isn’t taken soon, it could reach a point where Planet Earth is uninhabitable in no distance time.
The world can only hope that the UN’s damning report has prompted world leaders and policymakers to force the climate problem even further up their national agendas and crystallized the urgency of the issue.
Leaders, industry members and investors have pushed the cause of net zero with ever greater urgency in recent years. However, the planet is too diverse to apply the same solution universally without appreciating the intricacies within each region.
Through the current net-zero framework, emerging economies risk being left behind as part of the transition, a move that will not only bring devastating social and economic consequences for these countries but also will undermine the global transition entirely.
The need for a globally inclusive transition, which factors in emerging markets alongside developed nations, is an issue the world particularly attuned to as an African-headquartered asset manager.
Emerging markets, while the high emitters of today, are not responsible for the bulk of emissions to date and yet are set to face the most devastating consequences from climate change.
These regions face a huge funding gap to meet sustainability goals, a position that the pandemic has made more acute due to emerging markets’ slower economic recovery and less available fiscal firepower. A rebalancing of the capital deployed to emerging markets vs. developed markets is therefore vital if all stakeholders are to be successful in saving our planet.
Analyts say a further investment of $2 trillion to $4 trillion needs to be allocated to emerging economies if th world is to meet the Paris Agreement goals. It’s also estimated 70 per cent of the 17 Sustainable Development Goals and Paris Agreement capital needs to go to emerging countries; however 80 per cent of the world’s ESG/sustainable investment funds are focused on global or developed markets.
Action is needed to help close this funding gap. However, rather than being incentivized to plug this gap, the current frameworks are motivating investors to divest away from these emerging economies.
In response to the hugely complex climate dilemma, the industry has sought to look for simple solutions that can mobilize industries and investors into action. Targets set around minimizing Scope 1 and Scope 2 emissions have become the default for many investors in measuring and managing the emission output of their portfolio. However, in many instances portfolio emission cuts fail to translate into real world emission cuts.
The current framework is leading to counter-intuitive and counter-productive results. Allocating to the big tech giants can reduce a portfolio’s emissions, while allocating to the world’s biggest owners of renewable energy can increase portfolio emissions. Using this framework, therefore, investors could be motivated to allocate capital away from businesses playing a hugely significant role in facilitating the energy transition, to those who have little or even arguably a negative impact on the planet, all in the name of sustainability.
Also, responsible for 90 per cent of global emissions growth, reducing exposure from emerging markets could be seen as a quick win for asset managers and owners looking to reduce the emissions in their portfolio. Doubling a portfolio’s weighting to emerging markets increases portfolio emissions by 10 per cent, while halving the emerging market weighting causes portfolio emissions to reduce by five per cent.
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While doing so would look good on paper, the impact on the real world would be devastating, drawing much-needed capital away from high-emitting countries looking to transition to more renewable and sustainable forms of energy, exacerbating the funding gap and undermining the global transition.
If the world is to assist emerging economies in their transition, the world need to increase not decrease its allocation to emerging markets. Yet, the current framework discourages investors from doing so.
