[ad_1]
The world has less than ten years to change its course and avoid the climate catastrophe caused by man-made causes. As countries race to create transition taxonomies to address the crisis, senior executives of two of the largest sovereign wealth funds (SWFs), said Wednesday, March 23.
Three quarters of all emissions are from the energy sector. To achieve net-zero emissions by 2050, it will take a complete transformation of the sector. This will cost approximately $2 trillion annually. Knut Kjaer (the founding chief executive officer of Norges Bank Investment Management) at the Responsible Asset Owners Global Symposium.
Source: RAO Global APAC Events
He said that although the task is enormous, it can be accomplished. It will require a combination a number of factors to reduce carbon emissions.
“The contributions will come 25% from replacing oil, coal and gas with renewables like solar and wind. Additional 25% will be from improved energy efficiency; 20% [will come] from electrification such as electrical vehicles, about 10% from hydrogen and some from carbon capture and storage,” said Kjaer.
Knut Kjaer
Kjaer highlighted that the energy transition is also being propelled by the geo-political situation in Europe — making reference to the Russian assault on Ukraine. Russia has been a major supplier for oil and natural gas to Europe until now.
“I cannot imagine in the time of ESG investing where we put so much consideration into investing with purpose that Europeans will continue to voluntarily buy energy from such an aggressive state,” he said.
Kjaer believes that the green transition is about boosting investment in solar and wind farm. “We have all the potential, but we have lacked speed in the planning and realisation of the projects.”
ACTIVE MANAGEMENT
Prior to the UN drafting the Principles of Responsible Investing in 2000, ESG investing was primarily limited to high-emitting sectors. In contrast, a key feature of the UN PRI was to favour active engagement over exclusion, said Kjaer, highlighting that this also became the Government Pension Fund of Norway’s strategy.
Kjaer explained how many of the older oil companies such as Shell or Total have been very active in making large investment to innovate and extend their technological capabilities beyond traditional oil and gas.
“So divesting from those companies means that you are being less supportive of the green transition,” he said.
Source: RAO Global APAC Events
Kjaer encourages those who have invested in these types fossil fuel companies to engage them to enforce capital discipline, promote innovation, and ensure that they don’t waste capital on new fossil-fuel projects.
“Otherwise, there is a risk of these investments becoming stranded assets, so be active in guiding these companies to go green.”
DIFFERENT DEFINITIONS
Globally, billions of dollars are being invested in projects that are environmentally friendly and aligned with the environment. However, institutional investors still find themselves in ambiguous territory when considering sustainable finance definitions. There are many different interpretations.
This ambiguity has prompted efforts to create detailed rules or green taxonomies to define sustainable investments. For example, the European Union (EU) has developed a comprehensive “EU taxonomy of sustainable activities.”
Michael Kelly, chief legal affairs and corporate affairs officer at Ontario Municipal Employees Retirement System, spoke at an earlier session of Responsible Asset Owners Global Symposium.), discussed Canada’s efforts to create a taxonomy for a rapidly emerging category of the trending sustainable finance movement called transition finance.
In a nutshell, transition finance focuses not only on individual projects that require funding, but also evaluates a project’s operator by their transition strategy towards decarbonisation, as well as the strategy’s reliability and transparency. It is particularly pertinent to companies and industries that aren’t yet sustainable but will also need financing to become so in the future.
Michael Kelly
OMERS
“In a country like Canada, with a lot of natural resource industries, whether it is fossil fuel industries, or forestry or other industries, we found that some of the projects that were ongoing don’t neatly fit into some green finance taxonomies that are out there,” said Kelly.
While Kelly did not refer to the EU taxonomy specifically, in 2019, Canada’s Expert Panel on Sustainable Finance released its Final reportThe EU transition finance definition was rejected by Canada, which would have largely prevented investment from Canadian oil and gas producers.
“Is there not a space for countries that have high-emitting industries to make them less-emitting industries?” asked Kelly, discussing the concept behind Canada’s development of its own sustainable transition taxonomy.
“How can we go about encouraging finance into those areas? It’s not an easy process, because it means getting a large number of people to agree on what does or does not qualify, so it is still a work in progress.”
The goal is to identify projects that are eligible for transition financing. “For example, a net-zero by 2050 commitment,” said Kelly.
“You can set up a taxonomy that actually channels transition finance into these industries to make them less emitting. And in doing so, you’re taking emissions out of the atmosphere and doing something that is positive for the environment and putting these companies on a direction towards their net-zero 2050 goals.”
