The Way to Achieve Net Zero Must Be Inclusive

In figuring out a novel solution, it’s usually the “how” that spurs the most debate. So, too, with the path to net zero. Most of us accept the science of global warming. Most of us appreciate that without remedial action, the planet and its inhabitants will be at risk. There is a consensus that we must cut greenhouse gas emissions to net zero by 2050. There is no credible objection to why we need to act. Nor, really, to when. It’s about the “how.”

History, experience, and position in the world shape views. Our own roots, as an active investment manager, lie in South Africa. We were the first investment manager with an African background to sign the Net Zero Asset Managers Initiative. We did so because we believe in the goal – and because we believe there is a particular path to its achievement.

Investing for active returns as well as for net zero in the real world is challenging. We’re learning new disciplines for the industries and companies we assess. We must understand their sustainability models and how they affect company values. Assessing companies’ and countries’ transition pathways and commitment to achieving net zero needs analysis, deep sector knowledge and, very importantly, active engagement.

It’s in calling for active engagement that we differ from an approach to net zero that is unfortunately still common in developed markets.

There is a view among many developed-market investors that the way to reach net zero is simply by cleaning portfolios. In other words, by divesting from countries and selling companies characterized by high emissions. Yes, this will surely clean a portfolio. What it won’t do is clean the real world.

Let’s play this out.

Imagine if “portfolio purity” became the standard. We’d end up with a pristine array of developed-world portfolios concentrated in a narrow array of assets. At the same time, the rest of the planet would be left to its own devices, with assets prey to bad owners and irresponsible capital-allocation practices. We’d be guaranteeing a world of partial net zero, which, in turn, would guarantee no net zero at all. Emissions would not be reduced by 2050. They would be exponentially escalating.

To divest may demonstrate either a lack of understanding or of sincerity regarding the climate crisis, because divestment exacerbates the crisis.

While emissions in emerging markets are growing, the US and Europe have contributed a combined 62% of cumulative global historic emissions. Given who’s primarily responsible for emissions over time, it would be a craven act for rich countries, their investors, asset owners and institutions to abandon the rest. It’d be akin to removing the ladder from a burning house. The effect would be to starve emerging markets of investment capital at the very time they need an extra $2.5 trillion a year to finance their energy transitions.

Electricity is a primary example of a sector where positive engagement and finance could result in gargantuan change.

Many emerging markets rely on fossil fuels for power production. Per capita electricity from such fuels in South Africa is 89%; in India, 74%; and in Indonesia, 61%. By 2019, meanwhile, the price of electricity from solar photovoltaic and onshore wind had dropped below the price of electricity from gas and coal. Yes, a transition to renewables in these markets would be a mighty undertaking. But yes, also, a transition must take place. Not just for the benefit of these countries, but to ensure that there is a net zero for the whole world.

Hence our view that we must actively engage. This means staying invested, even in certain high emitters — but with the vital caveats of a fixed time horizon for change and immutable goals to achieve net zero. From companies, we must demand clear transition plans to 2050, capable of being measured and monitored. What we are calling for is patience, because a real solution will take time.

Our focus, as a global investment community, should be on the facilitation and provision of transition finance.

As an asset allocator, we encourage the commitment of capital to help finance the vast shift that’s required. We also encourage a commitment to refining the ways in which progress against climate goals is measured.  We would like to see the creation of financial instruments that help capital allocators align portfolios with a real-world and inclusive decarbonization. These instruments would channel capital to companies and projects that move the global economy closer to carbon neutrality and let poorer nations effect a transition to net zero. An inclusive transition, just and effectively financed, will be of benefit to all. There is no viable alternative.

Contributor Disclaimer
Ninety One is an independent, global investment manager dual-listed in London and Johannesburg. Established in South Africa in 1991 as Investec Asset Management, the firm demerged from Investec Group in 2020 and became Ninety One. Ninety One manages more than $190 billion and offers active strategies across equities, fixed income, multi-asset and alternatives to institutions, advisors, and individual investors around the world.

RIA Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not necessarily reflect the view or position of the Responsible Investment Association (RIA). The RIA does not endorse, recommend, or guarantee any of the claims made by the authors. This article is intended as general information and not investment advice. We recommend consulting with a qualified advisor or investment professional prior to making any investment or investment-related decision.

Author

Hendrik du Toit

Chief Executive Officer

Ninety One

Hendrik is Founder and Chief Executive Officer of Ninety One. He entered the asset management industry in 1988 and joined Investec Group in 1991, founding Investec Asset Management which rebranded to Ninety One in 2020. He also served as Joint Chief Executive Officer of Investec Group from 1 October 2018 until the demerger and listing of Ninety One from Investec Group on 16 March 2020. Hendrik is a Non-Executive Director of Naspers Limited and its European subsidiary, Prosus. He is also a World Benchmarking Alliance Ambassador. Previously, Hendrik served as a Non-Executive Director of the Industrial Development Corporation of South Africa. He has also served on the advisory boards of the Sustainable Development Solutions Network, the Expert Board of HM Treasury’s Belt and Road Initiative, the UN Business and Human Security Initiative, the Impact Investing Institute, and as Commissioner of the Business and Sustainable Development Commission. Hendrik holds an MPhil in Economics and Politics of Development from Cambridge University, as well as an MCom in Economics (cum laude) from Stellenbosch University.

Katherine Tweedie

Country Head, Canada

Ninety One

Katherine Tweedie leads the Canadian business for Ninety One, working with a wide variety of institutional investors, consultants and stakeholders across the region. She joined the firm in 2012 to develop the Investment Institute, Ninety One’s strategic partner and global insights platform. Prior to joining Ninety One, Katherine was a Director and Head of Africa at the World Economic Forum. She started her career in Toronto in 1999 in investment banking with BMO Nesbitt Burns. Subsequently moving into private equity with CIBC Capital Markets and then a single Family Office based in London-Johannesburg. Katherine holds a Master’s degree from Harvard University’s Kennedy School of Government and a Bachelor of Commerce (Hons.) in Finance and Economics from the University of Victoria, Canada. She is a Series 7 and Series 63 FINRA license-holder in the US. Katherine is an Aspen Institute Finance Leaders Fellow and a member of the Aspen Global Leadership Network.