Funds Europe – A recent World Bank paper explored how organisational constraints can hold back the green transition in emerging markets. The report analysed how credit constraints and poor firm management inhibit corporate investment in green technologies. With this in mind, what role can capital allocation play in accelerating the transition to net zero in developing countries?
Slabber – Who gives me the right or you the right or anybody else the right to tell somebody else what I should or should not do? When I go to the bank and ask for a loan, I don’t go with my own set of documents and terms and conditions; I go to the bank, ask them for a loan, and they set the terms. As far as allocating capital goes – at least in the short to medium term when it’s starting – the better way is to reward the behaviour that we want to see and not fall for somebody that’s asking for money and promising to change after.
Cardinale – We will look at a strategy that is consistent with a net-zero ambition, and we have to consider the portfolio and how different exposures will fit with that. That doesn’t mean that every exposure we have in the fund will be aligned with net zero, but we will ensure the portfolio, as a whole, is consistent with the ambition and will transition over time. We will be looking hard at emerging markets from the viewpoint of whether companies and countries are committed, but also whether we can do something to convince them to commit. It’s about both positive engagement and screening when it comes to asset allocation and portfolio decisions. Obviously, we also recognise emerging market countries face more challenges. Transitioning to net zero is harder for emerging countries than it is in the developed world. They don’t have the same amount of resources and they have other important priorities. In particular, they need to grow to be able to lift people out of poverty. We obviously need to balance out the transition with other important factors that have to be considered – that is, we need to see a just and fair transition for all.
Slabber – You don’t give money to governments, because most governments are not capable of allocating capital correctly. If you give money to politicians with a view of lifting their people out of poverty, you’ve got a 5% chance of any of that money landing on the ground. Going to the companies on the ground will make that difference, so the investment works as the way you want.
Bao – The Chinese government historically has given a lot of subsidies to electric vehicles in the past. At the early stage of electric vehicle development in China, the abuse of this system was widespread, with limited advancement of technology. Giving money to local governments is not as efficient as governments introducing clear rules and letting the capital markets play it out. Investors can play quite an important role as we, most of the time, are shareholders. If we can convert our role to so-called stakeholders in important decision-making processes, that can really make a difference later.
Spano – The allocation of capital can start with incentives but then has to work on its own, because the only way to develop new research is to have an investment process that is more efficient to create margins and aid profitability. Otherwise it’s going to be extremely inefficient. Then sooner or later, even a good intention is going to blow up.
Cardinale – Private companies sometimes are not efficient at allocating capital either, so we shouldn’t think that the private sector is necessarily better. We need to make sure that the right incentives are there, and indeed the financial services industry has a big role to play to make sure we can steer companies and governments in the right direction. The pandemic has also taught us that if you leave everything to the private sector, then you can end up in a lot of trouble. In a worst-case scenario, the government needs to step in. You need to strike a balance between the two.
Spano – At least with the private sector if you’re not going to be good, you’re going to be out of business. Only the good ones are going to stay.
Varsani – To channel capital in the right place and incentivise investors/asset owners, the first stage is having transparency on what the exposures are at the outset and defining those exposures.
When we’re thinking in the context of climate, we need to look at carbon emissions, fossil fuel exposure, but also risk exposure from a business point of view, a geographic point of view, an assessment of management of risks by companies, alongside climate scenarios as well. Once we have more of a holistic view of those risks, and also opportunities in terms of capturing disruptive tech, then end investors can make informed decisions about how they want to allocate their capital aligned with the exposures they want to take.
Slabber – A lot of emphasis is being been put on carbon emissions, the environment and global warming, but ESG has got two other letters that we need to look at: the S and the G. When it comes to the capital allocation, how do we also get government to follow in the direction that we want to go?
Politicians in general believe that they’ve got a short-term contract for a three to five-year period, and in that time, you must make as much money as you can because next term, you’re not going to be there. When it comes to the reward or the incentive that’s being given from these types of funds and capital allocation, they should look into the social and governance side of things, whereby you create something in those countries or jurisdictions that you want to work in that will outlive political cycles. Things like healthcare, education, social upliftment, and getting people to the next level.