BNP Paribas Asset Management has called for more investment capital to be directed towards ‘transition finance‘ for hard-to-abate industries such as steel, cement and heavy transport, in order to ensure a meaningful transition.
In an article on its website, penned by Malika Takhtayeva, ESG analyst, sustainable fixed income lead, and Thibaud Clisson, climate change lead, the asset management firm noted that while green investment has accelerated over the past decade, boosted by the EU’s Sustainable Finance Disclosure Regulation (SFDR) and EU Taxonomy, much of the capital to date has flowed towards low-carbon assets such as renewable energy.
‘Elephant in the room’
“The elephant in the room is that this approach ignores the need to provide finance to companies and sectors which are essential to the transition but not yet aligned – particularly high-emitting and hard-to-abate industries – to help them reduce their emissions,” the authors note.
“The result is that even though sustainable investing has grown hugely in popularity and investment portfolios have been decarbonising, real-world emissions are still rising.”
As they state, this approach to investing acts as an echo chamber of sorts, rather than supporting genuine industrial transformation – hard-to-abate sectors are particularly under-represented in sustainable investment strategies, despite accounting for a large share of global emissions.
“In reality, the transition is not yet replacing existing systems but rather adding new layers of clean energy on top of existing fossil-based infrastructure, without sufficiently phasing out existing supply,” the authors state.
“Actions by the most emissions-intensive sectors, companies and countries are crucial to put the world on a more sustainable pathway. But projects that could deliver meaningful reductions in environmental footprints often do not receive sufficient financial support.”
‘Carbon lock-in’
According to BNP Paribas Asset Management, more effective disclosure and transparency standards will be required in the future to avoid ‘carbon lock-in’, where capital continues supporting high-emitting sectors without credible decarbonisation pathways.
The authors call on investors to prioritise investments that deliver real-world impact, rather than simply lower portfolio emissions, as well as stronger alignment between loan and bond markets, clearer standards for transition-labelled instruments, and more rigorous impact reporting.
“Ultimately, minimising global temperature increases will depend not only on financing what is already green, but on helping everything that is not yet green to transition,” they state. “Investors, regulators and the finance community all have a big role to play in achieving this ambition.
“For investors, transition finance also represents an opportunity to move beyond exclusion-based strategies and start financing real-world decarbonisation.” Read more here.
