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Investors Searching for Right Climate Combination

Asset owners will benefit from a more flexible, innovative approach to investing in the climate transition, according to Jefferies.  

Asset owners globally are struggling to identify the optimal asset allocation for supporting a global climate transition and are limited by asset managers’ existing product offerings. 

Investment bank Jefferies interviewed 25 global asset owners, collectively managing more than US$10 trillion in assets, about the energy transition, publishing ten key takeaways from these discussions.  

“Even for asset owners who have net zero asset allocation policies or objectives, implementation varies from owner to owner – and is expected to change over time as measurement and metrics become more sophisticated, and regulatory regimes shift and evolve,” Jefferies said.  

Asset owners have recognised that new investment opportunities supporting the climate transition “will emerge across the economic stack”, according to Jefferies’ findings. Increasingly, they are looking for opportunities beyond traditional energy and industrial sectors to agriculture, commodities, technology, and professional services.  

“Yet, asset owners currently see very little by way of products from asset managers in these areas,” Jefferies said.  

The survey confirms demonstrable appetite for climate transition-focused products.  

A 2023 survey conducted by Invesco noted that 53% of assessed sovereign wealth funds intended to enhance their focus on funding the energy transition and 66% aimed to support supports that mitigate the effects of climate change.  

Additional research conducted by the world’s largest asset manager, BlackRock, noted that 56% of 200 global institutional investors plan to increase their investment allocations to the climate transition in the near term. 

At COP28 in Dubai, the first-ever mention of transitioning away from fossil fuels was made in the conference’s final text, providing investors with increased certainty as to the required direction of longer-term capital flows. 

Flexible approach 

Deciding the appropriate weightings for asset allocations is “crucial”, Jefferies said, recommending that asset owners implement a “less rigid” approach. 

“[This] may afford asset owners flexibility and new opportunities in allocating towards the transition,” the report noted.  

Asset managers should also consider offering more bespoke climate transition-focused investment products “as a normal course of business” to meet asset owner demand, Jefferies said. This may include products combining alternatives, private and public equity, it noted.  

“Many asset owners discussed co-investments as the most ‘targeted’ way to implement their portfolio views, but that this is not scalable,” Jefferies said.  

Beyond identifying transition-focused opportunities across other industries, asset owners could also consider expanding the scope of energy firms they invest in, the report added.  

The investment bank argued that the public market opportunity for energy companies in transition is “limited” to around 200 firms, whereas private companies present opportunities for asymmetric return profiles and advancing progress towards clean energy targets.  

Managers should nonetheless aim to seek out relevant investment opportunities across sectors that “may see tangential benefits” from the climate transition, it said. 

The EU and UK are in the process of introducing climate transition-specific fund labels for products, through the proposed reform of the Sustainable Finance Disclosure Regulation and the introduction of the Sustainability Disclosure Requirements respectively.  

Hitting the books 

To identify climate-related investment opportunities, asset owners must get to grips with the global and multi-disciplinary nature of the energy transition, Jefferies said.  

This includes increasing their scientific and technical expertise.  

“As the global marketplace moves towards implementation and deployment, asset owners will need to develop deeper in-house climate expertise (e.g., scientists, modelers, geographers, demographers) to overlay their existing approaches with additional insights and upgrades,” the report said.  

Given the critical role of policy in shaping the energy transition, asset owners “would also benefit from dedicated resources on this topic and deeper ongoing dialogue with policymakers”. In particular, Jefferies warned of a gap in understanding how policy developments may impact upon learning and scaling curves for key net zero technologies.  

Last year, a Net Zero Asset Owner Alliance (NZAOA) report said a continued lack of policy certainty and financial incentives would see investors miss out on investments worth US$275 trillion.  

NZAOA called on governments to ensure robust climate-focused policies are in place that facilitate private capital flows towards the net zero transition.  

At COP28, the UN-convened Principles for Responsible Investment (PRI) announced the formation of the Taskforce on Net Zero Policy, which aims to support transition planning by corporates and financial institutions by facilitating engagement with policymakers. 

“As many [asset owners] noted during our conversations, the energy transition will be far-reaching and transformative,” said Jefferies.  

“Akin to the first and second Industrial Revolutions and the Information Revolution, existing business models across sectors will be impacted, and joined by new and emerging industries.” 

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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