$50tn investment funds industry must help to finance green transition, IMF says

Just a fraction of funds are focused on sustainability

The $50 trillion global investment funds industry needs to step up efforts to finance the transition to a greener economy and help mitigate the effects of climate change, the International Monetary Fund has said.

The transition to net-zero emissions requires an unprecedented change in strategy by companies and governments, as well as investment of as much as $20tn over the next two decades, the Washington-based fund said.

“These investments would need to be orientated away from the fossil fuel sector and towards renewables as well as towards low-emissions solutions within sectors,” the IMF said in the green economy transition chapter of its World Economic Outlook report, which will be released next week. “The global financial sector can play a crucial role in catalysing private investment and accelerating the transition.”

Countries and multinational companies across the world are stepping up efforts to achieve a net zero-carbon future by 2050. But concerns are rife on whether there will be enough support from investors and lenders to finance the transition.

Funds with sustainability focus can be an important driver of the transition to net-zero. But the IMF says the industry is “too limited in size and scope to have a major impact and faces challenges related to greenwashing” - in which marketers mislead the public into thinking companies are environmentally friendly.

Total assets under management of sustainable investment funds are small but growing rapidly, more than doubling over four years to reach $3.6tn in 2020.

“Climate-orientated funds accounted for only $130 billion of that total,” the IMF said.

Strong fiscal policies, complemented by a broad range of regulatory and financial policies, will be necessary to facilitate the green transition, IMF officials Fabio Natalucci, Felix Suntheim and Jérôme Vandenbussche at the fund’s Monetary and Capital Markets Department wrote in a separate blog on Monday.

However, the positive role of funds comes directly from their ability to influence the corporate sector.

“Through stewardship, which includes direct engagement with firms and proxy voting, funds can effect changes in firms’ sustainability practices,” IMF officials said.

Activist investors “stunning the investment and energy industries” earlier this year by winning seats on Exxon Mobil’s board as part of their attempt to change its climate strategy is one example of the influence funds can exert, they said.

The Covid-19 pandemic has brought 'build-back-better' plans and greener economies into sharp focus, underpinning the need to invest in meeting the UN climate goals and making the transition to a net-zero economy. The 2015 Paris Agreement mandates that countries lower their carbon emissions to meet the goal of limiting the temperature rise to 1.5°C.

Energy companies are also coming under pressure from activist investors, governments and courts to reduce their carbon footprint and switch to clean energy.

Large institutional investors, including some of the biggest asset managers around the world, are also increasing the pressure by reducing their exposure to companies with heavy carbon footprints in their portfolios.

In September, more than 600 business leaders called on the G20 economies to end support for coal and halve emissions by 2030.

The signatories of an open letter included energy companies such as Iberdrola, Acciona and Enel, as well as blue chips Unilever, Netflix, Volvo Cars and Natura & Company. UAE companies such as Majid Al Futtaim are also part of the global call to take measures to mitigate the effects of climate change.

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Through stewardship, which includes direct engagement with firms and proxy voting, funds can effect changes in firms’ sustainability practices
IMF

In April, the IMF urged governments to set a higher global carbon pricing floor to help fight climate change. A carbon price floor, which the IMF has been recommending, imposes a tax on fossil fuels to incentivise investment in low-carbon alternatives.

A mix of carbon taxes and green investment stimulus could increase the level of global output by about 0.7 per cent and in the next 15 years and create around 12 million new jobs by 2027, the fund's managing director Kristalina Georgieva said.

For the sustainable fund sector to become an effective driver of the transition, policymakers should strengthen the global climate information architecture — data, disclosures, sustainable finance classifications including climate taxonomies — both for firms and investment funds and “ensure proper regulatory oversight to prevent greenwashing”, the IMF said on Monday.

To mitigate potential financial stability risks stemming from the transition, policymakers should implement a climate policy consistent with an orderly transition and conduct scenario analysis and stress testing of the investment fund sector, it added.

“The exact pathway of the transition to a green economy is still highly uncertain, including how it could play out across countries,” the IMF said. “It could occur at different speeds and through multiple paths, depending on countries’ transition policies, the development and adoption of new clean technologies and shifts in the preferences of consumers and producers towards low-greenhouse-gas products and services.”

Updated: October 7th 2021, 12:02 PM
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