Investors seeking to ‘green’ their portfolios can draw on a rapidly growing range of listed and unlisted impact equity funds. However, steering investments towards the global low-carbon transition remains far from a simple task in more specialist asset classes such as structured and private credit. These are areas where adaptability, nimbleness, and innovation are key. With this in mind, Danish fund selection platform Global Fund Search (GFS) brought together investment experts in a round table discussion led by James King, Head of Structured Finance at M&G Investments and Keimpe Keuning, Principal and Head of private markets ESG and impact investing at LGT Capital Partners.
When it comes to setting precise and all-encompassing net-zero targets, the panellists agree that the complexities of their various asset classes and differing client requirements mean that this is almost impossible to do. Each will take broad guidance from their respective firmwide policies or sustainability work from other departments such as listed and private equity but will nevertheless ultimately have to take each investment case on its own merits.
One such case that immediately comes up for discussion is the potential offered in ‘greening’ the residential or commercial property sectors via mortgage-backed securities (MBS). A portfolio of green MBS can be achieved by targeting mortgage loans involving either energy-efficient properties, or those that are targeting energy-related upgrades. By quantifying these improvements, it becomes possible to demonstrate a positive contribution to the net-zero carbon transition. In some jurisdictions banks are being increasingly incentivised to provide green loans via reduced capital charges.
Those managers active in private equity will aim to fund innovative companies providing battery storage, electric vehicle (EV) charging infrastructure, building insulation, and other businesses that can demonstrably claim to be accelerating the transition. To avoid direct technology-related risk, there is a focus on companies providing implementation or support service to proven clean technologies that are optimise electricity grids.
The experts around the table are enthused by the potential represented by the securitisation of low-carbon installations on residential properties, which many homeowners struggle to finance up-front. This involves private finance stepping in to ease the pressure on banks, which can take some of the loans off their books and redeploy the freed-up capital elsewhere. The panellists agree that there is enormous growth potential in this securitisation market as domestic heat pump and solar panel and system installations spread across the globe. There are nevertheless bumps in the road, with state-specific rules and guidelines complicating the process in the United States, and a need for more streamlined regulation in the EU.
Another key difficulty the discussion brings up is the accurate measurement and reporting of any sustainability or transition-related outcomes. While steadily improving in this respect, the private markets remain well behind their listed counterparts. Not all smaller enterprises are able to report on their carbon emissions to any level of detail. The managers will overcome these limitations by tracking overall improvement levels over time, or by incorporating proxy data. Sustainability gains in one area can also hide losses in areas, as evidenced by the example of financing EV purchases in India. Are the emissions gains offset by questions about the affordability of these EVs for the average consumer, and doubts about the climate credentials of the energy mix on the local power grid?
As they strive to further green their securitised credit and private markets portfolios, the asset managers and asset owners convened by GFS would like to see a more conducive regulatory environment and better access to reliable data. They feel the latter has improved markedly in terms of coverage and reporting quality over the past two years, but much of it is still geared towards equities and fails to capture the information needed for private and structured credit management.
The participants would ultimately like to see more incentives for transition investing in their asset classes, such as looser capital requirements. There is an impression that the securitisation market is still suffering from a regulatory hangover dating back to the 2008 financial crisis and measures taken at the time that are now hindering its progress in supporting transition investing. The experts also remain sceptical about the EU’s taxonomy, questioning whether it has thus far had any significant effect in boosting green investment. They acknowledge that it has improved transparency to a degree, but these market professionals would like to see it do more to support transition investing in their asset classes.
