Initial findings
Developed and emerging markets register a divergent range of outcomes in the index. The United States is the standout worst developed-market performer, reflecting very high emission and energy usage levels, which translate into very weak pathways scores, given the low starting point and limited progress to date. The United Kingdom and Denmark are the two strongest developed-market performers in the index. Developed Asia generally scores poorly, with Japan in the middle of the pack and Korea and Singapore weighed down by low levels of renewables and high energy usage.
Emerging markets rank higher than many might have expected, with eight out of the top 10 countries in our index. This reflects the fact that many of these countries are embracing the energy transition and, importantly, are currently able to mobilise capital to support decarbonisation efforts, but investment must be continued and increased to ensure these efforts are sustainable. However, the index also highlights several emerging-markets stragglers which are a long way off the momentum required to achieve decarbonisation. These countries require time, encouragement, and incentives, rather than any immediate withdrawal of capital. As such countries adopt the right approach, finance can be deployed to encourage good outcomes.
Financing an inclusive transition
Eerdmans states: “Asset owners need to commit capital to transition finance- both in dedicated allocations and the way they measure and monitor progress against climate goals in their core portfolios. Moreover, asset managers must develop suitable vehicles with the integrity and framework to provide comfort that committing to transition is not greenwashing.”
Creating financial instruments that help capital allocators align portfolios with a real-world, inclusive decarbonisation – i.e., instruments that channel capital to companies and projects that move the global economy closer to carbon neutrality and that enable poorer nations the opportunity to participate in the net-zero transition is imperative.
Where to focus: Electricity
Many emerging markets, including India, South Africa and Indonesia, still rely heavily on coal for electricity production, with fossil fuel accounting for 25-40% of total carbon emissions. Transport accounts for a further 9-18%. Since electric vehicles need a clean energy grid to deliver the benefit, by cutting emissions from electricity production it is possible to tackle 40-50% of total emissions in many emerging markets.
Four major funding streams need to be developed to clean up electricity generation in the developing world:
- Available capital must be scaled up for renewable energy roll-out
- Sizeable investment needs to be directed towards expanding transmission infrastructure
- Incentives for state utilities to accelerate the closure of high-emitting plants
- Funding for a fair transition for employees and communities at risk from removing reliance on fossil fuels
Eerdmans concludes: “Time is indeed short, and asset owners and managers cannot delay. But we must also be certain that our first steps are in the right direction. The race to net zero is not a race between countries. It is a race against time.”
