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.
—
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.
Disclosure: Schroders
Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realized. These views and opinions may change. Schroder Investment Management North America Inc. is a SEC registered adviser and indirect wholly owned subsidiary of Schroders plc providing asset management products and services to clients in the US and Canada. Interactive Brokers and Schroders are not affiliated entities. Further information about Schroders can be found at www.schroders.com/us. Schroder Investment Management North America Inc. 7 Bryant Park, New York, NY, 10018-3706, (212) 641-3800.
Disclosure: Interactive Brokers
Information posted on IBKR Campus that is provided by third-parties does NOT constitute a recommendation that you should contract for the services of that third party. Third-party participants who contribute to IBKR Campus are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.
This material is from Schroders and is being posted with its permission. The views expressed in this material are solely those of the author and/or Schroders and Interactive Brokers is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to buy or sell any security. It should not be construed as research or investment advice or a recommendation to buy, sell or hold any security or commodity. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.