Going green in a multi-polar world

BY HOW much has the world progressed in climate mitigation and abatement? A cursory look may be disheartening. 2024 was the hottest year on record; it was the first calendar year when temperatures rose by 1.55 degrees Celsius above pre-industrial level.

At the same time, geopolitical crises drove demand for fossil fuels; economic uncertainty also cast doubt on climate pledges. In the US, Donald Trump’s victory as president last November spurred anti-ESG (environmental, social, and governance) and anti-DEI (diversity, equity and inclusion) sentiment.

Yet, symptomatic of a multi-polar world, there are signs of progress outside the US. China, for example, is making strides on several fronts – not only in terms of its peak carbon and neutrality targets but also in expansion of its national carbon market beyond power.

Europe continues to progress, albeit at an uneven pace. In terms of the UN Sustainable Development Goals (SDGs), the European Union’s pace of progress was more than two times lower in the period of 2020 to 2023, compared with 2016 to 2019. Still, the European Commission has identified sustainability as a driver of the region’s competitiveness, particularly in energy transition.

The Asia-Pacific is likewise “significantly off track” in terms of SDGs, said the UN Economic and Social Commission for Asia and the Pacific in its 2023 progress report. The report cited “alarming regression” in climate action (Goal 13), “driven by the region’s vulnerability to disasters and continued greenhouse gas (GHG) emissions, which account for half of global pollution”.

Meanwhile, the global financing gap remains acute and growing. In a report, the Organisation for Economic Co-operation and Development reported that the annual amount of finance needed to fund efforts towards the SDGs in developing and emerging countries surged by 36 per cent from 2015 to 2022, due partly to climate change. But resources only grew by 22 per cent over that period. The annual financing gap has risen by 60 per cent from US$2.5 trillion to US$4 trillion.

DBS chief sustainability officer Helge Muenkel, who is a panellist in this edition’s roundtable, expects the region will require about US$2.2 trillion for mitigation, US$2.5 trillion for adaptation, and a further 10 per cent of that total for resilience-related investments over the next decade. But the amount in climate finance flows is a fraction of that.

“While the scale of capital needed is immense, it is not necessarily capital availability that is the issue – rather, it is the lack of risk-adjusted returns that are attractive enough to mobilise capital at scale. The priority must be on designing financing structures that shift the risk-return profile in favour of scalable investments.”

This occurs at a time when the global sustainable fund universe, comprising global open-ended and exchange traded funds, saw record outflows in the first quarter according to Morningstar data, amid fresh geopolitical challenges and an intensifying backlash against ESG. As expected, the US accounted for the largest outflow of US$8.6 billion, marking 10 consecutive quarters of outflows. Europe, a stalwart in sustainable investing, suffered its first quarter of net outflows since 2018.

Excluding China, the Asia ex-Japan region saw net inflows. Morningstar said Asia “remains steady with a consistent climate focus”.

Institutional investors, however, are a bright spot. The latest annual report of the Asia Investor Group on Climate Change (AIGCC) (State of Investor Climate Transition in Asia) found that more institutions are integrating climate into their investment processes, with a strong interest in accelerating climate solutions and transition finance. The group represents 230 of the region’s largest asset owners and managers, who collectively manage more than US$100 trillion.

AIGCC chief executive Rebecca Mikula-Wright said: “With our most comprehensive analysis to date of Asia’s most influential investors, the direction of travel is crystal clear: US$100 trillion of investor capital in Asia is ratcheting up their climate action plans and are looking for opportunities to invest. With markets in Asia highly exposed to physical climate risks and nature-related risks, we need to see more investor ambition in accounting for these risks in their portfolios as well as allocating capital to address them.”

There is also good news in a recent “Sustainable Signals” survey of individual investors by Morgan Stanley Institute of Sustainable Investing. It found that interest in sustainable investing remained strong and stable.

More than half of those polled planned to invest more over the next year, citing increasing confidence that sustainable investments can offer market-rate returns.