According to the World Economic Forum, we are facing a massive financing gap for the transition to net zero by 2050. The global financial system has fallen short by an estimated $125 trillion.
More worryingly, the problem has got worse rather than better over the last decade. In 2017, the UN calculated the financing gap for achieving the Sustainable Development Goals for emerging and developing nations at $2.5 trillion annually. That shortfall now stands at $4.2 trillion.
Consequently, the funds industry and private funds especially could and should play a key role in closing the financing gap.
This was one of the subjects discussed at the European Investor Summit held by Societe Generale Securities Services at its Paris headquarters on 1st October.
According to Joseph Pinto, chief executive of M&G Investments, that money will have to come from private capital, said Pinto. “I don’t think public states will have enough money to fund that gap. Private markets can play a fundamental role.”
“[Private market funds] provide the flexibility and access to unique investment opportunities,” said Pinto. “They are the engine of innovation and entrepreneurship. They are typically focused on the startups we need to drive our ESG issues.”
There are though some obstacles which need to be overcome if private funds are to play a key role. For example, there is a need for standardised impact measurements to help with reporting.
“Don’t let perfection be the enemy of good we can all channel capital this way – what makes environmental sense makes financial sense”
Jane Wadia, head of sustainability, core products and clients, Axa IM Core
Interest rate increases have had an impact on some sub-categories with a steep fall in IPOs and barriers to accessing funding which further increases the transition financing gap.
Private markets also need to be more accessible to a wider range of investors while those investors need to be aware of the liquidity risks involved.
Pinto did also highlight some ways these challenges can be met. For example, industry intervention can help. The Netherlands Advisory Board on impact investing has called for a minimum of 10% of AuM to be allocated to impact investing by 2025.
New fund structures like the ELTIF and LTAF in Europe and the UK respectively have helped to promote private market funds.
And then there is tokenisation which has the potential to not only make private market asset classes more accessible to investors but also to create a secondary market for these asset classes which would in turn create more liquidity.
The last property that will be needed is patience, suggested Pinto. “These are still niche products and they won’t appeal to everyone.”
The role of the funds industry in financing the transition was discussed in more detail during a panel debate hosted by Kokou Agbo-Bloua, Managing Director, UK Head of Research and Global Head of Economics, Cross-Asset and Quant Research.
According to Erin Bigley, chief responsibility officer, Alliance Bernstein, most companies are still at an early stage of their transition. Bigley also warned that the transition is going to be “non-linear”. “There’s a lot of uncertainty and feedback loops unaccounted for and a lot of tech innovation to come.”
However, the biggest challenge remains the amount of money needed for the transition, a challenge that looks like it will only get harder.
According to Tatiana Bosteels, senior economist, energy transition, at the European Investment Bank (EIB), public money may provide up to 30% of the money needed for Europe to meet its 2030 targets, equivalent to around €1.3 trillion per annum. The gap will get even greater when it comes to the 2050 targets. The private sector will therefore have a crucial role to play to finance the energy transition, said Bosteels.
“We have a $65 billion budget at the EIB and we have a number of targeted investment tools, products and funds to support the EU Green Deal. We aim to act as a catalyst for the private sector by developing markets and reducing risks. However, private finance will be required to bridge the remaining 70% investment gap. This represents a huge opportunity for strategic allocation of institutional and private finance,” said Bosteels.
In Bigley’s view, governments do have the means but it is a question of priorities.
Bigley also referred to the need to consider the social implications of the energy transition to ensure decarbonisation does not overly punish developing economies or heighten social risks such as modern slavery and other human rights abuses.
“There is a massive financing gap and we need public and private assets,” said Jane Wadia, head of sustainability, core products and clients, Axa IM Core. “Public assets bring scale. Within the equities market you have the stewardship aspect which is an additional lever. And you have instruments such as green bonds, where issuance has increased dramatically in the last decade, which can address very specific issues.
Wadia also urged investors not to let an insistence on perfection of data prevent them from taking action to decarbonise their portfolios and to focus their allocations on decarbonisation strategies to support the transition as well as climate solution strategies that invest in those companies helping others to meet their transition targets.
“Don’t let perfection be the enemy of good,” said Wadia. “We can all channel capital this way – what makes environmental sense makes financial sense.”
