Ninety One claims the race to net zero is not a race between countries. It is a race against time.
If the world is to achieve net zero at a speed comparable with the Paris Agreement’s goals, investors’ current approaches to allocating capital must change. The latest whitepaper by Ninety One, No one left behind: Building an inclusive transition for emerging markets, examines the flaws in asset managers’ and owners’ interpretations of net-zero which has led them to set portfolio-level carbon targets which will stymie global net zero ambitions. In response to these issues, Ninety One has launched the Net Zero Sovereign Index, which provides sovereign-debt investors with a high calibre, independently verified assessment of Paris alignment.
A successful net-zero transition requires swift action and adaptations in many other areas, including regulation, consumer habits, technology and – most pertinently for investors – capital allocation. The acute risk in capital-allocation models is that emerging markets will be starved of the finance they need to transition to net-zero, in turn making it harder for the global economy to shift to a ‘decarbonised’ model. Current net-zero approaches can have major negative economic and social impacts on some of the world’s least advantaged communities, which are often the most vulnerable to the impacts of climate change. No net-zero in some parts of the world means no net-zero everywhere.
Peter Eerdmans, Head of Fixed Income at Ninety One, says: “With the UN declaring its latest climate report a ‘code red for humanity’, there can no longer be any doubt that we must act quickly to address climate change. The first step in tackling this problem is for investors to get better at assessing whether an investment or portfolio is aligned with a credible net-zero pathway that works for all of the world’s 7.9 billion people. As a firm that has strong roots in an emerging market, we understand this more than most”.
Emerging markets are disproportionately exposed to climate change. What is needed is a more thoughtful and forward-looking approach to net zero, one that gives due consideration to the context in which each country operates, its potential to contribute to the world’s collective net-zero ambition, and its specific transition pathway.
Net Zero Sovereign Index
The Net Zero Sovereign Index, covers 115 countries across emerging and developed markets, and is the first index which incorporates the full range of emerging markets. Building on the Climate & Nature Sovereign Index (launched in 2020), the Net Zero Sovereign Index aims to support sovereign-bond investors’ engagements with governments, so that they can hold public officials to account and encourage positive change.
Eerdmans, continues: “Investors need better measures to decide what is the right and fair way to build net-zero-aligned portfolios. We developed the Net Zero Sovereign Index to address the growing need among asset owners and managers for the means to show that their sovereign bond portfolios are Paris-aligned and on a credible path to net zero. We believe the index provides greater capacity to support a fair transition for emerging markets and will help sovereign-debt investors hold governments to account for their climate policies and actions.”