A new report argues that achieving environmental goals will be impossible without supporting emerging economies to transition to sustainable energy.
A report from industry group Pensions for Purpose, commissioned by Ninety One and published earlier this week, found that UK pension funds allocated 0.1% of their assets to developing economies. This, the report said, meant schemes were overlooking critical investment opportunities that could drive significant global impact.
It highlighted the need for capital owners to help address a $4trn (£3trn) funding gap in emerging markets, which refers to the estimated cost of meeting the United Nations’ Sustainable Development Goals (SDGs).
However, with half of the SDG funding gap linked to the energy transition in emerging economies, these regions represented a critical opportunity for impactful investment, Pensions for Purpose argued.
Karen Shackleton, chair and founder of Pensions for Purpose, said: "UK capital owners possess immense potential to drive positive change in emerging markets, but realising this potential demands innovative risk management strategies and a long-term perspective.
“To truly address the global climate crisis, asset owners need to broaden their perspective beyond their own portfolio’s net-zero metrics and consider their real-world impact. Our report shows engaging with emerging markets is a necessary pathway to achieve tangible global sustainability outcomes.”
Impact through engagement
The report argued that, while emerging markets may require more due diligence, these jurisdictions should not be avoided.
It added that UK capital owners were well-positioned to promote change through engagement because of their scale of capital, influence on global investment trends, and commitment to environmental, social and governance goals.
The report also contended that, by adopting an active management approach to emerging markets, schemes could unlock higher returns while also contributing to global goals such as the Paris Agreement.
Daisy Streatfeild, sustainability director at Ninety One – which runs emerging markets and sustainability-related investment strategies – said: “Emerging markets account for over half of the world’s GDP and are home to 85% of the global population. Investment in these regions is critical to achieving global net-zero goals, yet there is a pressing need to ensure these transitions are fair and inclusive.”
Pensions for Purpose also collaborated with the World Benchmarking Alliance for the research. The alliance is also urging pension funds, asset managers, and policymakers to engage in deeper conversations on how to overcome barriers to emerging market investments, particularly in the pursuit of net-zero targets.
Gwil Mason, financial system engagement lead at the World Benchmarking Alliance, said: “This report underscores how UK pension funds are critical in driving sustainable development globally.
“By choosing to invest sustainably in emerging markets, these funds can significantly contribute to closing the SDG funding gap while potentially realising attractive returns – and ensure ESG is good news, not bad, for emerging markets.”
In its general election manifesto, the Labour Party said it would mandate net zero transition plans for financial services companies.
It said: “Britain’s world-leading financial services industry has a major role to play in mobilising trillions of pounds in private capital to address the greatest long-term challenge of our age.
“Labour will make the UK the green finance capital of the world, mandating UK-regulated financial institutions – including banks, asset managers, pension funds, and insurers – and FTSE 100 companies to develop and implement credible transition plans that align with the 1.5°C goal of the Paris Agreement.”
Further reading
Labour to mandate net zero transition plans (13 June 2024)
Assessing pension insurers’ sustainability performance (24 September 2024)
