Speaking at ESG Investor’s inaugural Stewardship Summit, UNEP FI’s David Carlin says transition finance flows to developing economies are too low to meet net zero targets.
David Carlin, Head of Climate Risk at the United Nations Environment Programme Finance Initiative (UNEP FI), has said more “expansive” thinking is needed from investors who don’t typically invest in developing and emerging economies to meet net zero goals.
Speaking at ESG Investor’s inaugural Stewardship Summit on Wednesday (10 May), Carlin warned that most fossil fuel financing was taking place in the developing and emerging world and the least amount of transition finance was flowing there.
“We risk getting to a point where even successful progress in the US and Europe is not going to necessarily bring us to that net zero objective by 2050,” he said.
His comments come as MSCI’s new Net-Zero Tracker published on Thursday (11 May) has found that public companies are projected to deplete their share of the global emissions budget for limiting temperature rise to 1.5°C by October 2026, two months sooner than previously estimated.
Carlin said different thinking was needed from investors to tackle the lack of transition finance going to the emerging and developing world.
“We [investors] need to be much more expansive in how we think and there needs to be much more understanding of the different ways to assess credit quality, to assess potential valuations and to recognise the models that we’ve followed in Europe and North America may not be the ones that are most fit for purpose in other parts of the world,” he said.
“We see that with the work from the International Energy Agency and others about the sky-high capital costs that renewable projects have in many parts of the world.”
Carlin said while money was on the table, with transition finance reaching USD 1 trillion this year, it would need to be three to six times that by 2030, “a scale that is staggeringly quick and in a world of higher interest rates,” he said.
He said part of trying to scale this finance would be rethinking global development finance to catalyse private capital and working with governments in the developed world and also emerging economies.
But he also said that political headwinds could slow down transition finance, such as rising interest rates making it more expensive, windfall profits from high fossil fuel prices meaning producers were less dependent on financial institutions and geopolitical tensions making policy coordination harder between actors such as China, the US, and EU.
“There’s a real need to see the private sector take an active role as advocates of capital allocation and acceleration,” he said.
In a later panel, Valeria Piani, Head of Stewardship at Phoenix Group, said engagement with policymakers and regulators would be the future of stewardship by investors on climate change.
Piani said regulators helped create incentives for acting on climate change, so it was important for asset owners to have a voice in the public policy domain. She said groups like the Net Zero Asset Owner Alliance Initiative (NZAOA) and the Institutional Investor Group on Climate Change (IIGCC) provided collaborative working groups in this area.
On engagement with companies on climate change, Piani said Phoenix Group’s approach included identifying the firms in its portfolio most responsible for its financed emissions for direct engagement, alongside the engagement its managers will do. “We estimate around 25 are responsible for 40% of our financed emissions out of our almost 500 [investee] companies,” she said.