Clients of the world’s largest asset manager are willing to accept higher carbon intensity in their portfolios, as long as their investments are transitioning towards green goals.
A BlackRock executive says clients’ priorities have changed over the past three years. From maintaining a “clean” portfolio free of carbon-intensive assets in the past, clients now want to see the impact of their investments on the low-carbon transition.
Speaking on a panel at the COP28 Singapore Pavilion on Dec 4, BlackRock’s head of sustainable and transition solutions, Jessica Tan, says the conversation “has really shifted”.
“Some of our most sophisticated clients… actually want assets that are greening; they want to see that transition. [They] understand that even though carbon intensity might be higher today, they want to understand the path — through a good transition plan, good execution and good reporting — to show the impact that their dollars are having on trying to drive capital towards the low-carbon transition,” says Tan, who is based in New York.
‘A very challenging journey’: GIC
See also: Singapore announces Asia-focused blended finance initiative Fast-P with US$5 bil target fund size
Identifying these “greening” assets, however, is “very challenging”, says fellow panellist Liew Tzu Mi, chief investment officer of fixed income and multi-asset at GIC.
“If you think about the scope of transition, [the] emerging markets are really where the opportunities are. But at the same time, from a commercial, private capital standpoint, these are very high-risk projects, and [they] may not have the commensurate rate of returns,” says Liew, who is also chair of GIC’s sustainability committee.
There are no universal standards to measure the credibility of transition pathways, adds Liew. “How do you even measure progress? Is it absolute? Is it relative? How do you take into account the fact that you’re starting from a different country, compared to someone else in the developed markets or a different sector, [with] very different starting points and levels of carbon intensity? So all these are things that we’re working on, [and] frankly, it has been a very challenging journey. But I think it’s something that we need to get done.”
According to Liew, 7% of equities in the MSCI All Country World Index (ACWI) last year were considered “green”, 10% were “high carbon-emitting” and 83% were in a state of “transition”.
GIC approaches these three “buckets of opportunities” in different ways, says Liew. “They have very different needs and very different decarbonisation trajectories.”
Naturally, the sovereign wealth fund is growing its investments in the “green” bucket while divesting assets that risk being “stranded” or lack a “viable transition pathway”, Liew adds.
Where GIC does “a lot of the heavy lifting” is in the “transition” category, says Liew. “It requires the whole team to think about how to engage with different companies to understand their transition pathway, encourage disclosure and also to vote responsibly.”
GIC is not doing this alone, adds Liew. GIC is part of the Asia Investor Group on Climate Change (AIGCC) and the Climate Action 100+, both industry-led initiatives that encourage institutional investors to take action on climate change.
Liew praises the Financing Asia’s Transition Partnership (Fast-P), an upcoming Asia-focused blended finance initiative announced by the Singapore government on Dec 3.
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Fast-P aims to mobilise up to US$5 billion ($6.67 billion) for green and transition projects by attracting concessional capital. These cheaper forms of funding, often from the public sector or multilateral development banks, help attract private capital into projects deemed risky or less profitable.
These “marginally bankable green and transition projects”, as Monetary Authority of Singapore managing director Ravi Menon puts it, require the help of blended finance.
Ultimately, the progress of transition in emerging markets will depend on how quickly different players can come together, says Liew. “You really need different ways for public-private partnership [to happen]; you really need this close engagement and dialogue across different stakeholders.”
From left: Moderator Tomas Naucler of McKinsey & Company, GIC’s Liew Tzu Mi, BlackRock’s Jessica Tan and SGX Group’s Loh Boon Chye
Not surprisingly, the vast majority of asset owners still seek returns, says BlackRock’s Tan. “The markets have to work together to figure out which of these projects are actually bankable.”
The “good news”, according to Tan, is that BlackRock is having “more conversations than ever” with its asset owner clients, who are keen to contribute both commercial and “catalytic” capital into such projects.
On the other hand, Tan also notes “a lot of interest” to partner with commercial capital in projects such as wind farms in Africa and solar companies in Southeast Asia and Latin America.
“There is a lot of opportunity out there for bankable projects. However, putting together the partnerships along different risk tranches is going to require some work. But I’m very motivated by the conversations at COP28; people are more willing to work together on this topic than I’ve ever seen before.”
Follow The Edge Singapore’s coverage of COP28 here.
Photos: COP28 Singapore Pavilion
