UK pension funds release draft principles for EM transition financing

Church of England-led emerging markets climate group highlights need to ensure net-zero metrics do not work against the Just Transition.

UK pension funds led by the Church of England Pension Board (CEPB) have raised the “drive for simplicity” when it comes to net-zero alignment metrics as a potential issue for emerging markets transition financing.  

On Friday, the Emerging Markets Just Transition Investment Initiative, the body launched in May by 12 UK pension funds, published draft guiding principles that will support their investment decisions in emerging markets.  

They included the need to revisit metrics such as implied temperature rise (ITR) to “ensure they do not penalise emerging markets”. The asset owners, representing £400 billion in assets, wrote that they will seek to “ensure that the drive for simplicity across the various net zero alignment metrics, especially ITRs, do not work against the Just Transition needs and paths of emerging market countries”. 

ITR is a forward-looking metric, expressed in degrees Celsius, designed to show the temperature alignment of companies, portfolios and funds with global temperature goals. 

The new guidance states that transition finance in emerging markets involves “considerations that differ in nature, scale and complexity than developed markets (DM) and need practical solutions”. It adds: “There is no Just Transition without recognising the complexity of this picture.”

Adam Matthews, CEPB’s chief responsible investment officer, told Responsible Investor: “Aggregated metrics could work against the Just Transition/emerging markets if they fail to accommodate Just Transition considerations (eg if they do not differentiate between portfolio, developed market and emerging market benchmarks, consider historical responsibility, ability to decarbonise, etc), and in so doing, they underweight or exclude emerging market investments at a time when more capital rather than less is required to drive the transition.  

“By raising this point, we are wanting to understand how ITR methodologies treat emerging markets in the light of the Just Transition, and whether current approaches need further refinement in order to drive transition at the system level.” 

Members of the initiative include the likes of Railpen, Brunel, Border to Coast, NEST and Legal & General’s workplace pension plan.  

The draft principles also warn that current approaches to global transition “do not make sufficient allowances for a differentiated pace of change and the varying level of policy and institutional support across emerging markets, nor do they enable a holistic approach to supporting a Just Transition at an economy-wide level”.

The investors argue that supporting real world emission reductions in emerging markets is “is not about simply funding renewables”, but also includes “transitioning existing high carbon assets to closure in line with a Just Transition”. What is needed is a “fairer and more nuanced approach for emerging markets”, they state.  

Developing pathways

To help achieve this, there is a need to develop and factor national and regional pathways into “emerging market net zero methodologies, stewardship and solutions”, the guidance states.

“If you are driven solely by alignment without taking account of differentiated transition paths, then it is likely investments in emerging markets will be greatly impacted,” said Matthews. “This in turn is likely to challenge what a Just Transition may look like if capital is being withheld from these markets, when in fact we have both a role to play in supporting the transition in emerging markets, as well as a vested interest in those economies transitioning.” 

Existing investor frameworks, including the Net Zero Asset Owner Alliance (AOA) Target Setting Protocol and Net Zero Stewardship, should also evolve to “incorporate emerging market considerations”, the guidance added. This should include the “development and implementation of a standalone net zero methodology for sovereigns”.   

Last year, CEPB collaborated with other funds to launch ASCOR – “Assessing Sovereign Climate-related Opportunities and Risk”. Matthews told RI that the initiative will shortly be consulting on its draft methodology.   

This work will be “vital in bringing understanding of what the transition means in countries and will be enormously complementary to our work on emerging markets”, he added. 

Feedback on the draft principles is now being sought, with the aim of publishing a final version of the guidance by the end of Q1 in 2023. 

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