Renewable energy: Asset allocator momentum is building
With Asia accounting for more than half of global fossil fuel consumption, there is considerable support in Asia-Pacific's investment community for the transition towards decarbonising the region.
The challenge, as always, is how to match investors’ commitment to alternative energy with suitable assets and deals. There are signs, though, that with the right political will, progress can be made.
“The evidence I am seeing - that a climate transition is accelerating - is that the conversation is moving deeper into organisations. In a bank or institutional investor, climate is no longer just the focus of the head of responsible investment,” Gordon Noble, Australia-based research director at the Institute for Sustainable Futures (IISF), told AsianInvestor.
In Australia, the debate moved ahead last week, when the government’s chief finance minister, Jim Chalmers, spoke to super funds and lobby groups at a meeting hosted by the UN’s Principles for Responsible Investment in Sydney. Attendees included AustralianSuper, AwareSuper, Cbus, Hesta, IFM Investors and Rest Super.
Chalmers spoke about the need for “more cooperation between investors and governments to modernise our economy and deepen and broaden our industrial base, powered by cleaner and cheaper energy."
Simon O’Connor, CEO at the Responsible Investment Association Australasia told AsianInvestor that renewable energy and the low carbon transition was a strong focus of the roundtable. "The government's commitments to sustainable finance will help to unlock significant capital towards lower carbon investments".
“There was a strong and aligned support for these measures, with a broad call from the investment sector for the government to press ahead with developing a sustainable finance strategy that would enable private finance to direct capital to renewables on an ever greater scale.”
Federal government consultation on a climate-related risk disclosure framework for Australia will close in mid-February.
GOVERNMENT ACTION IS KEY
The most active investors in the low carbon space in Asia Pacific, such as Singapore’s GIC, see governments increasingly willing to introduce carbon pricing mechanisms to penalise high emitters and incentivise investments in climate solutions.
“Such policy levers will support the notion that integrating sustainability will help to deliver good risk-adjusted returns over the long term,” said the Singapore sovereign in a report published last month.
Solutions ranging from geothermal energy to carbon capture and storage, or the use of more sustainable materials have drawn huge amounts of funding and, if deployed widely, could advance decarbonisation pathways.
As one of the largest institutional investors in renewables currently, GIC understands that to tackle climate change at scale, “public and private sector investors, regulators and businesses must come together to create partnerships anchored in shared values and common goals that drive value for everyone”.
Examples of such initiatives include the Asia Utilities Engagement Program by the Asia Investor Group on Climate Change (AIGCC), which aims to accelerate the decarbonisation of the region’s power sector through collective investor engagement.
Another is the FCLT Global industry toolkit, which guides investors and businesses on how to add resilience to their traditional focus on risk and return in light of today’s uncertain economic landscape.
"With a mindset focused on the transition and collaboration across communities, investors and policymakers, these shifts will break old value chains and form new, more resilient ones," said GIC.
From an investor perspective, Noble doesn’t see allocations to renewable energy as an indicator of the pace of climate transition.
“Energy production is a subset of the economy, so I wouldn’t expect the structure of super fund portfolios to bias towards a particular type of asset.
“What I do expect to see is super funds developing and implementing transition plans across their whole portfolio. The development of data and sustainable finance indicators is gathering pace.”
Examples of progress include the growth of the Partnership for Carbon Accounting Financials which provides a framework for finance emissions reporting.
Still, Noble acknowledged that there have been many false starts in the renewable energy space, and the politics of climate change both domestically and internationally has been characterised by “degrees of chaos and disagreement”.