Public-sector financing alone is not enough to tackle the global energy transition and the private sector will have to drive the change if the world is to meet its 2050 climate pledge, the chief financial officer of Siemens Energy has said.
Meeting net-zero targets will rely on breakthrough technology such as energy efficiency solutions, carbon capture and hydrogen-based fuels, Maria Ferraro told the fourth edition of the Abu Dhabi Sustainable Finance Forum on Wednesday.
A huge amount of funding is needed to scale up this technology to a commercial level, and governments need to set up incentive programme for investors to help accelerate its development, she said.
“The climate crisis can’t be solved by public capital alone,” said Ms Ferraro, who is on the executive board of Germany’s clean energy technology company.
“A successful and sustainable transition also requires the mobilisation of private capital, and while the global financial community is rising to this challenge, an investment gap remains due to the supply and demand side finance issues.”
About $50 trillion in incremental investments are required by 2050 to achieve net zero goals and cut greenhouse emission from about 51 billion tonnes per year. Much of the existing emission abatement can happen with existing technology but to accelerate the transition, investment in “breakthrough” technology is needed.
“The transition to net zero is not just about mitigating climate change. It also represents huge economic opportunities for business and investors to fund more sustainable business models,” she said. “This is absolutely necessary.”
Private-sector investments will help “co-create” new technology by taking advantage of some of the public sector incentives and governments’ stimulus packages for instance, she said.
In October, the International Monetary Fund urged the $50tn global investment funds industry to step up efforts to finance the transition to a greener economy and help mitigate the effects of climate change.
Sustainability-focused investments are on the rise, though, amounting to $3.2tn in 2020, which is an increase of more than 80 per cent from 2019, according to the UN Conference on Trade and Development.
Investments by sovereign investors globally into funds and companies following environmental, social and governance standards also surged by more than three times last year as government investment institutions continued to add sustainability-linked assets to their portfolios.
The climate crisis can’t be solved by public capital alone
Maria Ferraro,
chief financial officer, Siemens Energy
Investments by sovereign wealth funds in the ESG space surged to $22.7 billion at the end of last year from $7.2bn reported in 2020, Finbold.com said, citing data from industry tracker Global SWF.
To reach a net-zero target, the world needs a complete transformation of the energy system, as nothing else would “do the trick”.
“The industrial revolution took over 70 years. This next global revolution, the energy transition, has already begun, and frankly, we just don’t have any more decades left to get to net zero,” Ms Ferraro said.
“We must take responsibility as technology leaders, as financial partners, as governments and truly as global citizens.”
Banks and financial institutions have also stepped up their efforts to help clients achieve net-zero goals, Jean Lemierre, chairman, BNP Paribas told the forum.
The French lender is doing it one client at a time by helping them to “move from their current situation” and finance their technology and projects to reach their 2050 goals.
“The change will not come out of the blue,” Mr Lemierre said. “It will come through investing in existing technologies or investing in new ones.”
The energy transition to a net-zero world, however, should include everyone.
“We need to be mindful that nobody should be left aside,” he said, and the process should be “accepted by the people, by companies and by countries”.
Avatar: Fire and Ash
Director: James Cameron
Starring: Sam Worthington, Sigourney Weaver, Zoe Saldana
Rating: 4.5/5
What is the FNC?
The Federal National Council is one of five federal authorities established by the UAE constitution. It held its first session on December 2, 1972, a year to the day after Federation.
It has 40 members, eight of whom are women. The members represent the UAE population through each of the emirates. Abu Dhabi and Dubai have eight members each, Sharjah and Ras al Khaimah six, and Ajman, Fujairah and Umm Al Quwain have four.
They bring Emirati issues to the council for debate and put those concerns to ministers summoned for questioning.
The FNC’s main functions include passing, amending or rejecting federal draft laws, discussing international treaties and agreements, and offering recommendations on general subjects raised during sessions.
Federal draft laws must first pass through the FNC for recommendations when members can amend the laws to suit the needs of citizens. The draft laws are then forwarded to the Cabinet for consideration and approval.
Since 2006, half of the members have been elected by UAE citizens to serve four-year terms and the other half are appointed by the Ruler’s Courts of the seven emirates.
In the 2015 elections, 78 of the 252 candidates were women. Women also represented 48 per cent of all voters and 67 per cent of the voters were under the age of 40.
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
