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Asset Owners Ready to Back Clean Energy Transition in Emerging Markets

Policymakers have a key role in incentivising investment, pension funds say. 

Asset owners are keen to increase investment in the clean energy transition across emerging markets, but need more support to invest direct capital effectively. 

“We recognise that climate is a global problem, but investing in places like Asia and Africa is more challenging than investing closer to home,” said Mikkel Svenstrup, CIO of Danish pension fund ATP, speaking at the Climate Investment Summit this week, part of London Climate Action Week. 

“We’re willing, but we don’t have the understanding or feet on the ground to know where it’s best to channel capital. There is still a long way to go in this area.” 

Recent research published by the International Energy Agency (IEA) noted that global energy investment is set to increase by 8% in 2022 to reach US$2.4 trillion, with the majority of this capital being channelled into clean energy. Spending on solar PV, electric vehicles and batteries is growing at a rate consistent with reaching net zero by 2050, the report said, with the latter expected to more than double to reach US$20 billion this year.  

However, Tim Gould, the IEA’s Chief Energy Economist, warned that annual clean energy investments need to be much higher than the current US$1.4 trillion to be aligned with 1.5°C of warming. Further, the rise in clean energy spending “isn’t evenly spread”, with the majority taking place in advanced economies as well as China and India.  

“Beyond a small group, clean energy investment levels are still at the same level as they were in 2015,” Gould said, speaking on a panel alongside Svenstrup.  

“There is a big emerging dividing line in global efforts to reach energy and climate goals and creative thinking is needed on how we can bridge that gap.” 

Faith Ward, Chief Responsible Investment Officer at the UK-based Brunel Pension Partnership, said asset owners needed to look beyond data on past and current emissions levels in order to identify investment opportunities in the emerging markets.  

“It’s important for asset owners to be much smarter in their usage of data, and instead look at the degree of future alignment emerging market investments have with their decarbonisation goals,” she said. What are the trajectories of these companies and where are the opportunities? Working collaboratively with other asset owners and policymakers to overcome investment and data barriers is key to success.” 

Untapped opportunities 

Africa is an example of untapped clean energy investment opportunities, according to an IEA report. 

The continent is home to 60% of “the best solar resources” worldwide, but only holds 1% of solar PV capacity, the report said. Renewable energies like wind, solar, hydropower and geothermal account for over 80% of new power generation capacity added by 2030 in the report’s outlined Sustainable Africa Scenario. 

Investing in emerging markets’ transition efforts can help asset owners deliver greater real-world impact than investing in developed markets, according to an April report published by the UN-convened Principles for Responsible Investment. 

“Thinking about the future energy mix, there’s not going to be just one magic product out there – there’s a lot of capital needed in a lot of different areas of clean energy globally,” said ATP’s Svenstrup, noting that the fund has invested in the upscaling of a variety of clean energies, including geothermal heating, green batteries, offshore wind and hydrogen.  

In May, 12 of the UK’s largest pension funds – including Brunel – announced a plan to support the climate transition in emerging markets and identify opportunities, pledging to better understanding the needs of emerging economies and the extent of climate transition finance that will be required by governments and companies.  

Underpinning investment with policy support 

Greater direction is needed from policymakers to ensure asset owners are being incentivised to invest in the clean energy transition across emerging markets, the panellists said.  

“We need clarity from regulators, because they need to make sure the groundwork is done to accelerate the investment process,” said Svenstrup.  

At the Net Zero Summit co-hosted by the IEA and COP26 last year, governments were urged to standardise and align their global net zero targets to incentivise investors to back clean energy. 

Large corporates and institutions in Asia-Pacific highlighted regulatory barriers to sourcing renewable energy in a report published by sustainability disclosure platform CDP and RE100, a group of corporates committed to transitioning to 100% renewable energy. It includes six policy targets to encourage a globalised transition to renewable energy, including promoting direct investments in and offsite renewable energy projects.  

“As an investor, we want to see a cohesive long-term plan of climate action, so we can have the confidence that policymakers are standing behind their position and not going to undermine the commitments we’re making,” said Brunel’s Ward.  

The IEA runs The Clean Energy Transitions in Emerging Economies programme, which works with emerging market countries to help implement and fulfil clean energy and climate targets in line with the Paris Agreement, creating capacity to enable stronger policy action and encouraging innovation. 

Policymakers are working to accelerate the transition to renewable energy in developing countries. 

At COP26, the Energy Transition Mechanism Southeast Asia Partnership with Indonesia and the Philippines was launched to utilise public-private finance to accelerate the retirement of coal-fired power stations and unlock investments in clean energy.  

A US$8.5 billion financing package was also agreed by France, Germany, the UK, the US and the EU to accelerate the shift from fossil fuels to renewable energy in South Africa. 

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