Transition paths from brown to green assets are largely dependent on public policy, with finance sector playing supporting roles.
The road to net zero will be “messy and complex”, involving many compromises and requiring the participation of public and private sector organisations in partnership, said Joanne Manda, Regional Advisor, Climate Change and Innovative Finance, at the United Nations Development Programme (UNDP). Speaking during a panel session at the Ethical Finance Summit, she said transforming economies from brown to green would require a range of technology and policy solutions, especially in the ‘Global South’.
Countries’ efforts to decarbonise their economies will inevitably be influenced by their existing circumstances, resources and infrastructure, said Manda, noting, “Some countries still suffer power cuts and governments want to revamp old power stations.” While there is consensus on reducing emissions and minimising carbon footprints, some pragmatism has to apply to challenges such as energy sector transition, she said.
Financial institutions will need to play a number of roles in facilitating migration from existing business models, said Kaitlin Crouch, Sustainability Manager at Dutch bank ING. A “top-down push” on companies to transition to net zero necessarily comes from investors, she said, but banks have a critical role to play in financing capital expenditure, where they can have significant leverage in the move from brown to green assets. “We were one of the first banks to commit to steer our lending to align with the Paris Agreement. But to be successful in moving to net zero, it will take the whole world.”
Masja Zandbergen, Head of Sustainability Integration, at €176 billion AUM investment manager Robeco, said the ability of the finance industry to drive change is limited by government policy. “We can influence the companies we invest in and sometimes exert some pressure on governments,” she said. “But it is difficult to be more strict on carbon emissions when some governments still support dirty fossil fuel industries. We have to remember we are in transition; the private sector usually moves faster than the public sector and governments still have a lot to do.”
Robeco views its role as contributing to the decarbonisation of the “whole economy”, said Zandbergen. To decarbonise its portfolios, it uses five main approaches: excluding the ‘worst of the worst’, such as thermal coal, shale oil and arctic drilling; lowering the exposure to high carbon emitters in the company’s portfolios; engaging with companies and pushing them to set net zero targets; investing in companies developing solutions for energy reduction, renewables, etc; and applying climate scenario risk analysis to all portfolios.
Both Zandbergen and Crouch agreed that divestment alone is not a solution; financial institutions should use their influence to engage with high-emitting companies and persuade them to reduce emissions over time. Said Crouch: “You need to engage with clients in these sectors to ensure they have the support they need. This includes looking at forward capex and where it is going, whether it is going into the green assets required for transition.”
Rethinking economic ‘success’
In an earlier session at the event, Manuel Pulgar-Vidal, Global Energy and Climate Practice Lead at World Wildlife Fund International, said the world was entering a “new economy” in which climate considerations were becoming key. “The 21 May statement by the G7 Ministers of the Environment is integral as it defines a clear vision for the world for net zero by 2050,” he said. “We must leave behind the concept of GDP as a measure of the health of an economy and move to one in which the volume of carbon emitted is key.”
Pulgar-Vidal, who served as President of COP20, described the transition to net zero as a “big investment opportunity” but one that is not new. “Climate risk must be addressed now, including the phasing out of fossil fuels: coal, then oil followed by natural gas. But we must be mindful of the need to help developing countries to do this.”