For the global north to properly manage climate risk in investment portfolios the global south and emerging markets must also transition to sustainable growth.
Serious question time
If the global north does realise its ambitions of delivering net zero, will this be enough to avoid the worst effects of climate change on the world? And will investment portfolios be more resilient to climate risks?
As it stands this will not be the case in the long term. The growing global south, predominantly comprising emerging markets (EMs), is currently chipping away at the economic deficits between themselves and the north. This however comes at a cost, as their growth is currently heavily reliant on fossil fuels, putting further pressure on the climate and the interlinked ecosystems.
This piece aims to raise awareness about future carbon emissions and climate pressures from the global south. It will also acknowledge facts and explore potential solutions to help the global transition to a more sustainable world.
Rapid growth from this part of the world has demanded energy in abundance, as lifestyles have become progressively more like the developed markets of the global north, which currently still consume tenfold more energy1. However, based on trends in consumption levels, increasing energy demand from emerging economies is to be expected. In Southeast Asia (SEA) alone, primary energy demand grew on average around 4% per annum (pa) between 2000 to 2018, which is almost double the global average of 2% pa during the same period2. In 2018, four million (m) barrels of oil were imported into SEA daily, the burning of which is calculated to produce 547.5m metric tons of CO2 in a year2. In order to absorb these emissions, 8.2 billion (bn) tree seedlings would need to be planted annually and maintained for the following ten years3. This quantum of emissions increase is also being seen in Latin American markets, especially as they intensify their agricultural production. Brazil and Argentina are among the top agricultural producers and net emitters, in a global industry where production is set to increase by 58% by 20504. In 2021, Brazil alone emitted 170m tons of agriculture-related CO2, which would need over 2.5bn tree seedlings to be planted and grown over the following ten years to mitigate one year of its emissions5.
It is understandable why EMs want and need to develop and grow, but their current over reliance on fossil fuels to do so, comes at a high cost to the global environment. Reducing future fossil-fuel powered growth is crucial as, on current trends, EMs will contribute much carbon into the atmosphere causing irreversible damage to the planet.
Similar actions from the global north are equally important to slow current emission levels and avoid exceeding the desired 1.5ËC target. Net-zero objectives are pivotal in the present-day context, and most net-zero pledged economies and businesses are in the global north, where emissions and consumption are currently greatest. However, future growth in emissions is likely to come from the global south, and thus, it is evident that the global south must also join this sustainable transition movement. If and when the global north does achieve its targets, it does not mean that natural ecosystems or climate are safe. Climate change does not differentiate between regions, it will occur globally whether a region is a major emitter or not. This can be seen historically, with a polluting north severely impacting the global climate and adversely affecting the global south. For northern organisations to maintain low climate risk in their portfolios, a global climate transition is needed.
The global south needs to transition to a sustainable-growth model. But will this occur naturally by themselves, or should it be aided and supported by Northern governments and organisations?
A key reason why EMs will not be able to transition alone is that they are currently poorly funded compared to the Northern hemisphere. Indeed, the top 300 investment firms’ investments total only 2% in the Middle East, 3% in Africa and 5% in South America6. Goldman Sachs for example, has just over 610 funds, of which only around 110 are in EMs7. With one of the biggest asset managers in the world having only around 1/6 of its funds focused on EMs, how can they be expected to transition on their own? As it stands, if they do not have additional support, and were to rely solely on borrowing and taxes for a transition, it would leave them 5% poorer a year up until 20606. It is simply not feasible for growing economies to be forced to become poorer when they are trying to grow, and living standards are already so uneven.
To address this, more governmental and institutional funding needs to be directed towards this sustainable movement and the north can and should help a Southern transition. And a good start would be to begin delivering on their decade-old pledge of US$100bn for the global south8. This would certainly support, and perhaps accelerate, a sustainable transition to lower carbon economies, while indirectly helping the north to deliver on its own targets. Joint private / public collaborations should also be accelerated to help with this endeavour which, if successful, could have the knock-on effect of attracting more capital in the short term and reducing climate-related risks in portfolios in the long term.
A possible shorter-term action for investors could be to increase their investment in the renewable energy sector overall, and specifically in EMs. Renewable energy in the south is seen as vital for their development, but progress is slow. Notwithstanding, governments across the south are generally supportive of more renewable energy production. For instance, the supranational Association of Southeast Asian Nations (ASEAN) aims to develop their renewables sectors such that they produce around a quarter of their primary energy by 20259. In addition, all Latin American countries’ governments have pledged to produce 70% of their energy from renewables by 20309. It is welcome that the shift to renewables is supported in this way by governmental structures and their pledges, as is the involvement of non-governmental groups such as the World Bank. For example, their involvement in the REWA Ultra Mega Solar Park in India will prevent the emission of 100m tons of CO2 into the atmosphere10. Such funding of, and support for, the growing of the renewables sector in EMs in this way means they have a higher chance of succeeding. As such they should be intrinsically attractive to investors; with their added benefit of mitigating overall climate-related risks. It is clear then that increased Northern support for a shift to renewables in EMs is essential from a planetary perspective, and could be good for their overall portfolio risk in the process.
Enlightened self interest
In order to mitigate the worst impacts of climate change in the future, there needs to be a transition to a sustainable growth model in the global south. For this to occur, it will need to be better funded and renewable energies could be a promising focal point for both reducing carbon emissions and introducing investment into EMs. This funding and support should come from the north, which is in its own interests, particularly in relation to achieving climate-related targets. There should however be an acknowledgment that the transition will be slow and, even when targets are met, the south’s carbon emissions may still be increasing.
An important element of this transition is a shift in thinking among decision makers, particularly at large asset owners in developed markets, around their fiduciary duty. So far fiduciary duty has focused narrowly on financial gains from an exchange. This transition period could be used to interpret fiduciary duty more broadly to incorporate the concept of greater global gain. This could take the form of investment strategies that mitigate overall climate risks as well as provide financial opportunities for poorer regions.
We are at a key moment in the transition and now may be a pivotal time to broaden fiduciary duty to factor in the greater goal of global sustainability. This should be beneficial for investment portfolios in the long run, and could mean the realisation of a more just and fair transition to sustainable growth in the global south.
Emile, a student from Exeter University, completed a summer internship with TAI in 2022.
1 Hickel, J. ‘Existing Climate Mitigation Scenarios Perpetuate Colonial Inequalities’. The Lancet , Planetary Health, Volume 3, no. 7 (July 2022): E628–31. https://doi.org/10.1016/S2542-5196(22)00092-4.
2 Aleluia, J., P. Tharakan, A.P. Chikkatur, G. Shrimali, and X. Chen. ‘Accelerating a Clean Energy Transition in Southeast Asia: Role of Governments and Public Policy’. Renewable and Sustainable Energy Reviews 159 (May 2022): 112226. https://doi.org/10.1016/j.rser.2022.112226.
3 ‘Greenhouse Gas Equivalencies Calculator’, 28 August 2015. https://www.epa.gov/energy/greenhouse-gas-equivalencies-calculator.
4 Arcipowska, Aleksandra, Emily Mangan, You Lyu, and Richard Waite. ‘5 Questions About Agricultural Emissions, Answered’, 29 July 2019. https://www.wri.org/insights/5-questions-about-agricultural-emissions-answered.
5 ‘Brazil Launches Carbon-Reduction Goals for Agriculture | Argus Media’, 20 October 2021. https://www.argusmedia.com/en/news/2265624-brazil-launches-carbonreduction-goals-for-agriculture.
6 World Economic Forum. ‘Why Net Zero without a “Just Transition” Is Not an Option’. Accessed 26 July 2022. https://www.weforum.org/agenda/2022/05/why-net-zero-without-a-just-transition-is-not-an-option/.
7 ‘Fund Finder’. Accessed 26 July 2022. https://www.gsam.com/content/gsam/uk/en/advisers/products/fund-finder.html.
8 Climate Action Network. ‘“COP27 Must Commit to a Finance Facility on Loss and Damage”’, 3 May 2022. https://climatenetwork.org/2022/05/03/cop27-must-commit-to-a-finance-facility-on-loss-and-damage/.
9 Pinsent Masons. ‘Accelerating Renewables Growth in South America’. Accessed 22 July 2022. https://www.pinsentmasons.com/out-law/analysis/accelerating-renewables-growth-south-america.
10 World Bank. ‘Transitions at the Heart of the Climate Challenge’. Accessed 22 July 2022. https://www.worldbank.org/en/news/feature/2021/05/24/transitions-at-the-heart-of-the-climate-challenge.