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Institutional sustainability flows hindered by obstacles

By Rhea Nath
5 minute read

While there is a strong global appetite for responsible investment, three executives have pointed out obstacles hindering investors from funding the climate transition.

The International Renewable Energy Agency has identified an “enduring investment gap” in funding the transition, with research indicating that approximately US$5 trillion will be needed annually until 2030 to meet targets.

In 2022, global investment in all energy transition technologies reached a record high of US$1.3 trillion; however, it fell short of the necessary amount required to remain on track.

Three sustainable investment executives have identified a lack of product awareness, the need for consistent global standards, and durability of policy across governments as some of the barriers that continue to hinder the progress in closing this gap.

At a panel during the RIAA Conference in Sydney last week, Erika Rodriguez, head of sustainable investing for APAC at KKR, highlighted the need for institutional investors to reconsider their approach to climate investments.

“Institutional investors traditionally bucket investments according to very clean asset classes and risk-return profiles; and climate, it’s a theme that requires transformation across different asset classes from transportation, energy, environmental services, so I think that that’s one barrier where we have to think about it differently,” she said.

“The second barrier is, and I understand it’s quite challenging, but [it’s] inconsistent regulation in different regions. When you’re looking to invest in climate with a global lens, such as KKR, there’s a lot of talk about geopolitical risk, so you need to understand your political topics, how to navigate that, be able to engage with government and policy, and then have local, on-the-ground expertise.”

Pointing out the multitude of regulations across global financial markets linked to climate investing, she noted significant developments over the past 18 months, including the Inflation Reduction Act in the US, the Green Deal in the European Union, the expanded ASEAN sustainable finance taxonomy, and the Monetary Authority of Singapore’s transition finance taxonomy.

Additionally, a joint industry-government initiative – led by Australian Sustainable Finance Institute in partnership with the Commonwealth Treasury – was launched in July 2023 to develop an Australian sustainable finance taxonomy.

“It can be daunting for any investor that wants to invest in climate,” Rodriguez said.

‘We need more client money’

According to fellow panellist Xuan Sheng Ou Yong, sustainable fixed income lead, APAC at BNP Paribas Asset Management, liquidity has emerged as a major challenge across asset classes.

“We need more client money,” he admitted.

“I’ve had the fortune to speak to many clients, prospects as well, here in Australia, but one thing I realised is that not many fixed income investors are aware that green bonds exist. Or maybe they’ve heard of it, but don’t really yet fully grasp the potential of green bonds in their portfolios.”

He said there is a concern regarding product awareness about the existence of such investment vehicles, as well as a seeming lack of information about how these investments can contribute to both investment returns and climate impact returns.

“It’s a challenge that, for ourselves, we are more than happy to fight to overcome, and we really want to spread that word. Even if investors don’t want to invest with us, that’s okay. At the end of the day, we need that investment into these kinds of instruments,” he said.

Ou Yong also emphasised the importance for investors to “spend a little time to do homework” in order to delve deeper into the substance behind the label of green investment offerings.

“What exactly are the projects, assets that this issuer is saying is green? Is it really green? How good is it? Taxonomies help, setting standards also help in trying to standardise what goes in and one doesn’t go in.”

However, London Stock Exchange Group’s Helena Fung, head of sustainable finance and investment for Asia-Pacific, highlighted the importance of addressing the availability of green products in the market before categorising product labelling.

“The green bond level of issuance itself remains fairly small as a part of total fixed income issuance, so that in itself is maybe a place to start, even before you get into how to characterise and categorise transition labelling,” she observed.

“I’d also add that, when I speak to companies, I find in many cases, once you get past the larger companies, [they’re] not necessarily aware of what the opportunities are for them in their industry. So, from that perspective, I would say better guidance, industry playbooks would be really useful. We see a lot of appetite for that as well.”

Ultimately, all three panellists agreed that durable policy is a crucial consideration for institutional investors when it comes to funding the climate transition.

“It’s hard to underwrite policy benefits if policies change every four or five years,” KKR’s Rodriguez admitted.

“In Australia, you’ve done a great job in terms of having a very stable policy with renewable energy development, and I understand from the policy standpoint, this is quite difficult because a lot of the technology and the data is evolving.”

Ou Yang added that global governments “cannot afford to flip-flop” in this crucial area.

Additionally, he highlighted the importance of a measured, gradual approach to more sustainable economies to ensure nobody gets left behind.

He explained: “We need consistent policy, regardless of whoever is governing, but at the same time, if you want to go forward or progress, also not too fast because you need to keep you need to let the market catch-up.

“You need to have some form of stability or manage improvement for bring[ing] everyone together. If it’s too fast, you run the risk that people get left behind.”