UK Pension Funds Set Course to Fund EMs’ Just Transition

Guiding principles for asset owners open to feedback before being finalised early next year.  

In a move to better support emerging markets’ (EMs) climate transition efforts, 12 UK-based pension funds have unveiled draft guiding principles that will inform their sustainable investing strategies. 

The Emerging Markets Just Transition Investment Initiative will advocate for a fair transition in EMs by supporting real world emissions reductions, developing mechanisms to identify and support transition in countries most impacted by the climate crisis, supporting country-level agendas on socioeconomic development and equity, and improving transparency and engagement. 

The pension funds have also pledged to align their policies and approaches to understand and enable a just transition in EMs, which includes developing and incorporating national and/or regionalised transition pathways into their EM net zero methodologies, stewardship and solutions. This will involve reviewing their existing climate change policies, commitments and initiatives, targeting a “more nuanced approach” for EMs, they said. 

The collaborative initiative, between asset owners representing 18 million beneficiaries and owning £400 billion in assets, aims to identify credible transition assets in EMs while also accounting for the impacts of transition on workers, consumers and supply chains. The initiative was first announced in May, with members including the Church of England Pensions Board, Brunel Pension Partnership and Railpen.  

Asset owners increasingly recognise the importance of mobilising capital in markets that can’t afford to finance their own climate transition, but have previously cited challenges such as legal and governance risks, access to local expertise, and identifying credible investment opportunities.

“As asset owners, we are committed to achieving net zero,” they said.  

“However, supporting transition finance in EM involves considerations that differ in nature, scale and complexity than developed markets and need practical solutions. There is no just transition without recognising the complexity of this picture.” 

At COP27, the Independent High-Level Expert Group on Climate Finance published new research outlining that US$1 trillion in annual international investments is needed to properly support climate action in developing countries. This figure is expected to rise to US$2.4 trillion a year by 2030 to build resilience, cover the loss and damage caused by climate change, and restore nature and land, the report said.

Scalable, multi-asset solutions 

The members of the initiative will further work with bodies that have launched investor frameworks – such as the Institutional Investors Group on Climate Change’s Net Zero Investment Framework – to ensure that they incorporate EM-related considerations to enable a just transition, including the development and implementation of a standalone net zero methodology for sovereigns.  

The third draft guiding principle in the proposed guidance is de-risking investments in support of intentional EM-focused allocations within and across asset classes. The group noted the need for a “flexible approach” that supports collective and bespoke approaches across asset classes, in particular infrastructure, debt and equities. There is also a need to “see scalable EM transition investment vehicles” with a risk/return focus through blended finance, they added, with first loss support, guarantees and co-investments. 

For the latter, asset owners are more reluctant to invest in smaller blended finance vehicles, due to concerns around overexposure if their investment makes up a large percentage. However, bigger products are in the pipeline, such as Allianz Global Investors’ planned US$1 billion climate solutions blended debt strategy targeting EMs. 

Recent research by global network Convergence noted a “significant decline” in the scaling of climate-focused blended finance transactions between 2019-21, calling for increased policy action and focus from investors.  

Focus on intentionality 

The group of UK pension funds is now seeking feedback on its draft guiding principles, with plans to publish a final version by the end of Q1 2023.  

“The finalised principles are intended to be integrated into and inform the way we will understand the transition in EM as well as intentionality in our investment approaches,” the pension funds said. 

They have further called on other pension funds committed to investing in EMs’ climate transition efforts to join the initiative and contribute to developing investment opportunities aligned with the outlined approach.  

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