Ninety One: Averting chaotic disorder in the transition to net zero

Nazmeera Moola 1

Growth in transition investments and transition related targets can help mitigate disorder to achieve a lasting transition to net zero.

08  March 2023,  A transition to net zero is unlikely to be neat or methodological. Evidence suggests we are at the start of a disorderly transition. How disorderly the transition becomes will be influenced by asset owners, investors, and companies’ own emission-reduction plans.  The latest research paper by Ninety One, A disorderly transition, argues that growth in transition investments and transition-related targets can help mitigate disorder to achieve a lasting transition to net zero.


Nazmeera Moola, Chief Sustainability Officer, Ninety One: “Reaching net zero will rely on investment in new green infrastructure as well as investment in decarbonising high-emitting companies. Both are needed to achieve real-world decarbonisation. This is especially true of the five sectors that are responsible for more than 90% of global emissions and are essential for economic growth – power, buildings, mobility, industry, and agriculture.  These industries are central to global development. Any disruption to their output will have a significant impact on the global economy. The transition, therefore, must be as orderly as possible.”

From disorderly to orderly

Decarbonisation of high emitters takes time. These companies cannot change overnight. They are capital-intensive with fixed assets and established business models that need to evolve. In most cases, new technologies will be required to help companies decarbonise. In certain countries, for example, South Africa, pronounced social issues such as employment and workers’ rights take precedence over environmental considerations. We cannot always simply put “planet” before “people”.

There is no one-size-fits-all solution for heavy-emitting sectors. Corporate environmental strategies have diverged substantially due to a range of factors, such as uncertainty around technologies, timescales and structural changes. Even within specific sectors, such as utilities, companies are setting very different courses towards net zero, with some companies far more aggressive in their pursuit of renewable energy strategies.

The chances of a more orderly transition increase with a coherent transition assessment framework that can define credible transition opportunities. Here, the Sustainable Markets Initiative’s Transition Categorisation Framework helps identify and support transition potential, and, where appropriate, sets aside problem cases. This is fertile ground for active managers seeking alpha from success stories — companies facilitating the transition rather than perpetuating the problem — and where the market does not fully understand or price in the transition potential.

Moola continued: “As credibility builds and the investment industry learns to assess transition plans, we expect asset owners to become increasingly comfortable with adopting transition-based climate strategies. The highest-emitting companies and industries require investors who can own them, challenge them on the credibility of their plans, and hold them to account over time, as they evolve.”


Transition investments for asset owners

Public companies account for the vast majority of the world’s emissions, forming an important transition universe for equity and debt. With the bulk of this transition potential sitting in the five top-emitting sectors, many companies in these sectors are household names in developed and emerging market economies. We expect transition debt to form the backbone of new capital to fund transition plans. The lower cost and flexibility of debt markets support innovation and, crucially, the ability to link lending to transition-related goals and targets. Debt will also be the most effective tool to mobilise private capital from wealthy nations towards emerging markets, where the bulk of emissions growth needs to be addressed.

The low-carbon transition will have marked macroeconomic effects – notably, the potential for higher inflation. Investment in the transition leaders across the five highest-emitting sectors could provide some inflation protection and solid returns. In the  longer term we will, we believe, arrive at a global energy system that is cheaper and less vulnerable to supply shocks.

Moola said: “It is our view that the low-carbon transition will prove Darwinian for many industries in the medium- to long term, but especially to those industries that sit at the crux of the problem. Companies in these economic areas that can successfully make the transition by either developing new technologies or through significant decarbonisation of key industrial processes stand to be rewarded by the market via enhanced access to debt and equity financing and higher market valuations.”

Conversely, companies in these emissions-intensive areas that are unable to evolve will experience the opposite. They will likely face an increasing struggle to access capital and to attract lower market multiples. This should present considerable opportunity for active managers seeking alpha generation, as winners and losers diverge sharply over the coming years. All the more so because the starting point includes sectors and industries that trade on a very significant discount to the broad market. We expect this ̒transition premium’ to manifest itself more clearly in the coming years.

Actionable steps

Transition investing is set to keep growing in importance, especially as it is becoming clearer that starving heavy-emitting sectors of capital is not going to solve the real-world problem. We believe that in core investment mandates, asset owners should assess the transition plans of their heavy emitters and commit to robust engagement with those companies to encourage and catalyse their transition. This should replace a policy of divestment from all high-emitting companies. “Clean portfolios” achieve nothing. Additionally, asset owners should consider dedicated allocations to transition strategies, both equity and debt, that specifically target the areas and sectors that need to decarbonise and incorporate robust assessment of the transition credentials of all investments in the strategy. This should include measurement of the carbon-avoided or the reduced impact of the investment.

While there will inevitably be subjectivity around the appraisal of a company’s transition plan – as there has always been around the strategic and financial plan of any company – it is important that this does not get in the way of engaging with heavy-emitting companies across the main five high-emitting sectors to drive the evolution of their business models.

Moola concluded:

“Disorder is a spectrum and minimising the level of disorder is likely to have the best outcome for the planet, economic growth and, ultimately, investment performance.”

Featured News

This Week’s Most Read

Wealth DFM