How Can Investors Ensure A “Just Transition” In Climate Change Fight?

A dollar invested in emerging and frontier markets can do more for the climate emergency than one invested in developed markets, but we must ensure plans are fair to all.

Much of the discussion around COP26 is naturally focused directly on the challenge of the climate crisis and its amplified effects on emerging and frontier markets. We believe investment in these growth markets can not only help tackle climate change, but also help ensure it is done in a way that benefits all. That is the essence of the concept of a “just transition”.

Clean slates: why investing in emerging and frontier markets could have a greater impact

At BlueOrchard we believe a dollar invested in emerging and frontier economies could have a much greater impact for people and the planet than a dollar invested in developed markets, while providing returns. 60% of the global GDP comes from these markets and they are home to 85% of the world’s population.

In addition, the demographic profiles of emerging markets (EM), their rapid ongoing transformations and accelerating digitisation have resulted in growth trajectories that are outstripping more developed peers. Crucially,  these economies can embrace innovation that allows them to “leapfrog” developed countries in the application of new technologies.

One example would be renewable energy in Africa. The focus here is not how to  upgrade the current infrastructure. It is how access to clean energy can be provided to people that simply don’t have it at present. This provides a significant opportunity for investing in climate action.

Impact investors are also at the centre of advancements in financial inclusion. Financial inclusion is the access to formal financial services and products, which supports entrepreneurs and formal jobs, as well as female empowerment.

While most directly of social benefit, financial inclusion can also contribute positively to the fight against climate change.  An example would be the importance of financial institutions in EM/frontier markets as points of sale and distribution for climate insurance, renewable energy loans, energy efficient housing finance, among others.

Supporting the “just transition”: from climate insurance for smallholder farmers to clean energy

Discussions at COP26 in Glasgow underline the importance of the topic. Developing economies have raised concerns that economic support commitments received in the past have not been met. Indian prime minister Narendra Modi announced the country’s new target to reach net zero emissions by 2070. But Modi also attached a condition that $1 trillion be made available to developing economies to support the transition. 

The importance of equity and fairness runs through the climate agenda. Unless the costs and benefits are shared, a global commitment to faster action will be diffic

Both BlueOrchard and Schroders are represented on the G7 Impact Taskforce, determined to make the “just transition” much more than another lens for investment strategies.

For us, the just transition means  combining climate action with fair socio-economic distribution and giving impacted communities a voice. What that means is that as we seek a transition to a greener future, we must do so while accounting for the impact on all people and communities.

This includes the jobs created, as the support of local people is vital to deliver on our climate goals. Beyond being beneficiaries of the transition, people living in emerging markets must also be the protagonists.

What can this look like in practice?

Providing smallholder farmers with access to climate insurance to sustain their livelihoods in case of extreme weather events, is one example. We have also supported underserved communities in accessing clean energy, green transportation and telecommunication infrastructure. And we have not forgotten that 75% of people displaced by climate change are women.

The goal is to create a lasting positive impact using innovative investment strategies in private debt and private equity, or the green and sustainable bond market and in the sustainable infrastructure sector. Leveraging our investment teams in EM/frontier markets, their market intelligence and daily field experience is of course what makes the real difference in any investment decision we make. 

Casting the nest wide: why climate finance needs to span private and public assets

We also recognise that to give the transition the best chance of success, the ability to invest in it should be open to as many people as possible.

Investment strategies in climate finance with greater liquidity, by combining private assets solutions with a high impact listed debt, are crucial. By ensuring climate finance spans private and public assets we can maximise its scale and support more initiatives.

Indeed, blended finance has been critical in accelerating a just transition. Public-private partnerships remain incredibly valuable in the path to net zero. What is required for a just transition is much more than simple financing and de-risking measure. Capacity building and policy changes are crucial for the mind-shift required.

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Originally Posted on November 8, 2021 – How Can Investors Ensure A “Just Transition” In Climate Change Fight?

The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.