2023 was the planet’s hottest year in recorded history, and Antarctic Sea ice coverage also dropped to a record low. With climate change one of the world’s most pressing risks, its social and financial impact is already visible in the increasing costs of climate disasters for countries where events occur and for their supply chains. As more governments and business entities have announced net zero carbon ambitions and launched climate disclosures, it is critical to ensure their transition roadmaps are robust and credible enough to lead us to a net zero future.
According to the International Renewable Energy Agency, US$5 trillion of global investments are needed per year from 2030-2050 to keep global warming on the 1.5-degree Celsius pathway. This means that investments must more than triple 2022 levels to meet this growing financing gap. However, transition financing remains a significant hurdle for corporates and financial institutions alike, as challenges like a lack of climate mitigation and adaptation planning, and fragmented climate data and disclosures remain. This is especially urgent in Asia as the region accounts for half of global carbon emissions and produces about 85% of its energy from fossil fuels but it is not on track to deliver its 2030 climate targets. It is therefore in Asia’s long-term interest to invest in a transition to more a sustainable business model.
Jenn-Hui Tan, chief sustainability officer, Fidelity International comments: “Unlike green finance where funds are allocated to projects that are already meeting ESG criteria, transition finance is about helping carbon intensive sectors become more sustainable over time. However, clearer definitions of credible improvements are needed to reduce greenwashing risks and improve investor confidence in the ‘transition’. Asia will play a significant role in supporting global energy transition efforts and doing so will also unlock investment opportunities.”
“As a global asset manager, Fidelity International has been actively monitoring investment opportunities in Asia including operational efficiency, renewable energy generation, electric vehicles and related materials and infrastructure, as well as supporting global regulatory and framework development related to transition finance. The next phase of economic growth in Asia needs to be cleaner, healthier and more sustainable. The region is well placed to capitalise on the potential of the transition by leveraging its rich natural and human capital as well as technological innovation.”
Global investors are acknowledging that clear disclosure guidance and a favourable regulatory environment, in addition to funding, are required to address systemic climate issues and catalyse transition finance. A range of initiatives has emerged to tackle the climate crisis, and we are seeing an accelerating response from governments, regulators, corporates and the financial sector. Gradually, frameworks are emerging to help companies put in place robust strategies to meet their net zero targets.
Governments are also seeking to close policy gaps to make green technologies cheaper while regulators are working to channel transition financing to the right places. System-wide initiatives such as the United States’ Inflation Reduction Act provide support to develop technologies like green hydrogen and sustainable aviation fuels. The Transition Plan Taskforce in the UK aims to standardise private sector climate transition planning by providing general and sector specific best practices. Global regulations on fund products such as the UK Sustainability Disclosure Requirements (SDR) also recognises ‘transition’ as an investment category. These developments are expected to drive improvements in corporate transition planning and disclosures as well as speed up relevant capital allocation.
Stewardship is key to supporting corporates to prioritise transition
Transition planning and implementation may involve broader stakeholders such as regulators, resulting in additional hurdles for corporates. Investors are well-placed to support investees to understand systemic climate risks and opportunities and share their expectations of robust transition roadmaps. While investors conduct extensive research to analyse the technical nuances of climate transition, stewardship activities such as engagement and voting also play a significant role in highlighting the uniqueness of individual corporate transition plans and allowing investors to make decisions accordingly. Where companies’ actions and efforts are deemed inadequate, investors can escalate engagement intensity and express their position through voting, emphasising the board’s role in ensuring a credible transition through cultivating an enabling corporate culture and behaviour, right incentive structures, and transparency to investors.
Tina Chang, Associate Director, Sustainable Investing at Fidelity International comments: “Transition often does not happen in a linear fashion and requires a strategy that is unique to the market, the industry, and the company. Our engagement with companies focuses on the local challenges and opportunities presented and highlight the importance of effective communication for investors to evaluate whether a transition strategy is credible. Such communication is especially important in Asia because climate and ESG disclosure is relatively nascent, so companies are often tackling the dual challenge of building out disclosure capacity while setting targets.”
“Fidelity’s transition pathway mainly focuses on bottom-up investment research integration and top-down stewardship engagement. Our proprietary ESG rating tool coupled with our climate rating allows the investment teams to consider long-term transition prospects of companies in a holistic manner. Our thematic engagement prioritising thermal coal phase-out on the other hand starts from the top-down identification of material thermal coal exposure to strategize and conduct timebound engagements with companies with the aim to phase out thermal coal.”
In line with Fidelity’s ambition to achieve net zero across its investment portfolios by 2050, including halving its portfolios carbon footprint by 2030, and to phase out investment in thermal coal in OECD countries by 2030 and globally by 20401, Fidelity continues to reinforce its approach to addressing climate issues.
Jenn-Hui Tan, Chief Sustainability Officer, Fidelity International comments: “At Fidelity, we continue to evolve our approach as the sustainable landscape changes. As more businesses publish credible transition plans, it is important for asset managers to champion further developments in transition finance and engage with regulators and governments to close policy gaps to make green technologies cheaper and channel transition financing to the right places.”
About Fidelity International
Fidelity International offers investment solutions and services and retirement expertise to more than 2.87 million customers globally. As a privately held, purpose-driven company with a 50-year heritage, we think generationally and invest for the long term. Operating in more than 25 countries and with $728.6 billion in total assets, our clients range from central banks, sovereign wealth funds, large corporates, financial institutions, insurers and wealth managers, to private individuals.
Important information
Issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (‘Fidelity Australia’). Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity International. For more information about Fidelity Australia please visit www.fidelity.com.au.
This media release is provided for general information purposes only and is not intended to constitute advice of any kind. To the maximum extent permitted by law, no responsibility or liability is accepted for any errors or omissions or misstatements contained in this media release.
© 2024 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited.
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