BTA2023 Prudential plc (Prudential) today released two whitepapers on climate transition financing. The first presents a framework for investing in energy transition while taking into account emerging market issues.
Because there is no accepted definition of transition finance, Prudential has established its own proprietary methodology, defining it as investments directed into industries and enterprises with the sole goal of supporting and accelerating the net zero transition.
Prudential’s strategy is principles-based, making it applicable to a wide range of asset managers and asset classes. The second paper, co-authored with Prudential’s asset management arm, Eastspring Investments (Eastspring), investigates a realistic investing methodology that outlines how to build a capital markets climate change portfolio.
The framework intends to overcome two market difficulties that Prudential perceives in terms of financing the endeavour to combat climate change:
• There is a need to finance ‘brown to green’ (high carbon to low carbon) projects, but no standard definition exists.
• Emerging markets in Asia and Africa demand a proactive and balanced strategy to the low-carbon transition, taking into account their specific problems.
Ben Bulmer, Prudential plc’s Chief Financial Officer, stated, “Our responsible investing approach capitalizes on our unique position as a big asset owner in Asia and Africa. Our presence in these growing markets provides us with a unique perspective on ethical investing.
We take advantage of this opportunity to persuade industry, peers, and investee firms that emerging markets must play an important part in the global energy transformation.”
“As Prudential’s asset manager, Eastspring has a unique opportunity to contribute to a fair and inclusive transformation.
According to Vis Nayar, Chief Investment Officer at Eastspring Investments, “climate goals cannot be met if we ignore transitioning companies (brown-to-green or brown-to-less-brown) that are committed to emissions reductions and moving towards climate-resilient business models.”
He continued, “Given that current industry guidance in transition is primarily focused on principles, emissions, or activities, our Investment team has developed a framework that proactively identifies such companies across markets and sectors; this broadens the investible universe and allows investors to identify potentially mispriced assets.
The Eastspring-Prudential Climate Transition concept can be applied to capital market portfolios across asset classes, and we believe that this innovative technology can assist the market reach its full potential for driving significant change.”
Climate Bonds Initiative, an international non-profit organisation dedicated to mobilising global money for climate change, undertook a technical evaluation of Prudential’s framework and the Eastspring-Prudential strategy to climate transition in financial markets and approved both.
They certify that the transition category alignment and composite transition screen established by Eastspring and Prudential were led by the Climate Bonds Initiative’s basic principles to ensure the legitimacy of transition finance, and they support them on that basis.
Sean Kidney, CEO and Founder of the Climate Bonds Initiative, stated, “If we are to leave our children with a livable and affluent world, the global transition must be credible, ambitious, and swift.
Asset owners and asset managers may play an important role in aligning economies with net zero pathways and avoiding portfolio risks such as carbon lock-ins while developing and thriving in a net zero economy by employing clear, comprehensive investment frameworks and guidance like this.”
Prudential has announced investments in the following climate transition funds, coinciding with the launch of the finance framework:
1. Brookfield’s Catalytic Transition Fund, the first specialised fund for transition investing in emerging economies, received a US$200 million investment from a founding investor. The fund is a blended finance instrument that invests in clean energy and transition assets in emerging markets.
2. KKR, a worldwide investment firm, has committed up to $150 million to a climate-focused strategy. The strategy aims to invest in infrastructure equity in Asia for the energy transition, including climate adaptation, mitigation, and brown-to-green transitions.
Mr Bulmer commented on these investments, saying, “Our investments in these funds demonstrate our commitment to climate transition leadership and our support for blended finance.” We realise the significance of this sort of finance in facilitating energy transition, as simply investing in green initiatives may not be enough.
Given that Asia accounts for more than half of all carbon emissions1, Prudential sees major potential arising in the region.
He continued: “We are very pleased that Climate Bonds Initiative have endorsed our frameworks as we aim to align to industry standards and frameworks to encourage standardisation in the market.”
Prudential’s responsible investment strategy is based on a just and inclusive approach, which also informs its approach to climate change in emerging countries.
