ESG Stampede Reduces Financing for Carbon-Intensive Companies

The flip side of the stampede into sustainable investments in recent years is that companies with the greatest need to decarbonize are increasingly starved of funding.

Lack of finance is the biggest impediment to pivoting the global economy to net-zero emissions, according to a report from Standard Chartered Plc based on a survey of 250 corporate executives and 100 investors and analysts. The study found although almost 90% of investors say the world won’t reach net zero by 2050 without investment firms financing the transition, 70% of senior business executives say investors are reducing their exposure to carbon-intensive assets, making it harder for them to shift to low-carbon business models.

ESG investing, a style of money management in which environmental, social and governance issues are considered alongside regular financial metrics, has grown into an estimated $40 trillion industry as clients, regulators and the general public demand financial-services firms design portfolios for a greener and more equitable future. That’s encouraged investments in clean energy and electric vehicles and, in some cases, has resulted in divestments of large emitters.

“To reach net zero, investors cannot just walk away from carbon-intensive sectors,” Amit Puri, Standard Chartered’s global head of environmental and social risk management, wrote in the report. “Financing these companies helps them invest in the research and development critical for developing clean technologies and pivoting their business models.”

Many carbon-intensive companies are “actively engaged in the net-zero challenge” and they will play a key role in the transitioning of global infrastructure, energy supplies and consumer products, Puri said. As such, strategic investment in these industries can in fact “help to drive a more sustainable future,” he said.

And investment is desperately needed: 85% of the surveyed companies said they require medium or high levels of investment to transition to net zero and 67% said lack of capital is a significant barrier to transitioning. In emerging markets, that number rises to 73%.

To further complicate matters, the time to achieve the transition is short. Scientists have said emissions will need to drop by about 45% by 2030 and reach net zero by the middle of the century to avoid the most catastrophic impacts of climate change and reach the Paris Agreement’s goal of keeping global warming below 2 degrees.

However, 55% of senior executives said their companies were not transitioning to net zero fast enough. Despite the pressing need to cut emissions, many companies are deferring action by at least a decade: 71% said they plan to make the most progress towards net zero between 2030 and 2050.

“By delaying their transition journey, companies are risking much more than missing net-zero targets,” said Adityadeb Mukherjee, head of climate risk management at Standard Chartered. “This will play out in the form of the more obvious physical risks brought by climate change, but also the effects of a more disorderly transition, which could impact financial markets and the provision of capital at a time when companies need it most.”

©2021 Bloomberg L.P.

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