Transition Finance: A Key Strategy for Sustainable Investing in Southeast Asia
In the evolving landscape of sustainable investing, transition finance has emerged as a pivotal strategy, particularly in Southeast Asia. Liza Jansen, Prudential’s head of responsible investment, emphasized this during a recent panel discussion at AsianInvestor’s 5th Insurance Investment Briefing in Singapore. As the world grapples with climate change and environmental degradation, the need for innovative financial solutions to support companies in their transition to more sustainable practices has never been more urgent.
The Purpose of Sustainable Investing
"Our purpose is to help people get the most out of life, and we see sustainable investing as core to that purpose," Jansen stated, highlighting Prudential’s commitment to integrating environmental, social, and governance (ESG) factors into its investment strategy. This approach is not merely about avoiding investments in companies that fail to meet sustainability standards; it is about actively supporting those that are on a journey toward improvement.
Jansen articulated the essence of transition finance: "We need to think about transition finance. How do we finance companies to go from brown to green? Because if we only finance green, we’re not going to make the change that we need." This perspective underscores the importance of engaging with high-emission sectors rather than divesting from them, which could lead to a loss of influence over their sustainability practices.
Prudential’s Comprehensive Approach
Prudential has a long-standing commitment to ESG integration, which includes an exclusion policy that bars investments in coal companies generating more than 30% of their revenue from coal, as well as controversial weapons and tobacco. However, the company goes beyond exclusions by employing a multi-faceted approach to promote positive change within its portfolio.
"We look at ESG factors in our investment process. We engage with companies on ESG issues. We vote our shares. We have a climate strategy," Jansen explained. This proactive engagement is particularly crucial in emerging markets, where the challenges of sustainable investing are pronounced.
The Unique Challenges of Emerging Markets
In Asia, where many high-emitting sectors exist, Prudential recognizes the need to find innovative financing solutions to facilitate transitions. Jansen pointed out that divesting from these companies could lead to assets being acquired by investors with less stringent sustainability objectives. Instead, Prudential aims to engage with these companies to foster improvements in their practices.
However, Jansen also noted a significant challenge: the existing sustainable finance frameworks, such as the EU taxonomy, are often not tailored for emerging markets. "There’s less disclosure, less transparency. But we see that as an opportunity to engage with companies and help them improve their practices," she said, emphasizing the potential for positive change through collaboration.
A Balanced Approach to Sustainable Investing
William Chow, investment officer at Singlife, shared insights on his company’s approach to sustainable investing. Singlife adopts an active strategy for private assets, focusing on renewable energy and decarbonization technologies, while employing a passive strategy for public assets. Chow highlighted the importance of balancing risks and opportunities in this context.
"We’re invested in areas such as renewable energy, sustainable infrastructure, and green bonds," Chow explained. However, he also acknowledged the challenges of selecting appropriate climate indices for public assets, which can lead to tracking errors if not carefully managed. Singlife partners with external managers to implement stewardship activities, including transition finance, ensuring that their investments align with sustainability goals.
Addressing the Challenges of Net-Zero Transition
Michael Ridley, executive director and head of fixed income sustainability and climate research at MSCI, echoed the sentiments of Jansen and Chow regarding the critical role of transition finance in achieving sustainability goals. He identified the lack of standardized metrics and reporting frameworks as a significant barrier to assessing the sustainability performance of companies.
Ridley emphasized the need for supportive policy frameworks to incentivize sustainable practices. "Without this policy support, it will be much harder to achieve our net-zero goals," he warned. He also highlighted the importance of technological innovation in driving the transition to a low-carbon economy, calling for breakthroughs in energy storage, carbon capture, and sustainable agriculture.
The Social Dimension of Sustainability
While environmental concerns are paramount, Ridley reminded the audience not to overlook the social aspects of ESG. "We can’t forget the ‘S’ in ESG," he cautioned, stressing the need to manage the social impacts of the transition to a low-carbon economy equitably. Collaboration among governments, businesses, and investors is essential to ensure that the transition is just and inclusive.
Conclusion: A Path Forward
Despite the challenges posed by the transition to sustainable practices, the panelists agreed that the opportunities outweigh the difficulties. With the right strategies and commitment, companies like Prudential and Singlife can play a crucial role in facilitating the transition to a more sustainable future. As Jansen aptly put it, "If we only finance green, we’re not going to make the change that we need." Transition finance is not just a financial strategy; it is a pathway to a more sustainable and equitable world.
In conclusion, as Southeast Asia continues to navigate the complexities of sustainable investing, the focus on transition finance will be vital in driving meaningful change across industries. The collaboration between investors, companies, and policymakers will be essential in creating a resilient and sustainable future for all.