At a recent roundtable event KPMG’s Climate Risk and Strategy team invited members of the infrastructure fund community to engage in a discussion on the challenges and opportunities related to the global transition to a low-carbon economy.
The world, as it stands today, is at a critical juncture:
- First, the world is not decarbonising fast enough to meet the Paris target of 1.5C. Recent UN analysis suggests that the planet is on track to warm as much as 2.8C by 2100*
- Second, infrastructure, and the built environment generally, accounts for almost 80% of global GHG emissions;
- Finally, the OECD estimates that meeting 2030 global development targets will require around USD 6.9 trillion in infrastructure investment.
Taken together, how does the investment community respond to global development needs and stay on a decarbonisation pathway simultaneously, given the sector’s outsized contribution to global GHG emissions? There are no simple answers, but infrastructure funds are uniquely placed to respond to these intertwined challenges.
What was covered? The conversation focused on three discussion points regarding climate-related regulations, emissions data and defining ‘sustainable investment’:
Discussion Point 1: Embedding sustainability into the investment decisions process
With the 2050 net zero target rapidly approaching, there is no doubt that decarbonising portfolios and investing in lower carbon infrastructure investments is crucial. However, many factors are deterring investors from effectively embedding sustainability into the investment decision-making process.
Firstly, there is an overall mistrust of the quality and availability of emissions data, and many firms not yet conducting scenario analysis. As a result, firms are reluctant to take investment decisions where they have inadequate data. Secondly, the trade-off between long-term benefits of investment in climate-resilient, low carbon assets and the obligation to meet short-term returns expectations remains. The combination of data mistrust and the emphasis placed on short-term financial returns is preventing the implementation of ambitious climate strategies.
Discussion Point 2: Complying with TCFD and capturing its strategic value
The introduction of the Taskforce for Climate-related Financial Disclosures (TCFD) is a welcomed development by the infrastructure fund community for many reasons: climate change is firmly on boards’ radars, disclosure practices have improved, and investors are beginning to consider their investments’ longer-term impacts.
However, there is a noticeable knowledge gap amongst stakeholders, from asset- to product-level, on the strategic value of the TCFD framework. Many view the TCFD as a compliance exercise which is a substantial use of resources and time, as opposed to a tool that can embed climate risks and opportunities into investment decisions and efficiently channel capital towards low-carbon opportunities and improve operational resilience.
Discussion Point 3: Defining ‘sustainable investment’ under SFDR, the risk of greenwashing, cross-border complexities, and trade-offs
The lack of a universal definition of ‘sustainable investment’ under the EU’s Sustainable Finance Disclosure Regulation (SFDR), coupled with the growing litigious risk of greenwashing, is putting some firms off pursuing sustainable investment activities.
Additionally, each climate-reporting framework – TCFD, SFDR and soon SDR – differs in scope, audience, and disclosure requirements, making the reporting practice resource-intensive and difficult to roll out to portfolio companies.
The roundtable concluded that despite the mistrust of data, perceived regulatory bottlenecks and knowledge gaps, doing nothing was not the optimal option, and it is important to be on the front foot.
Overall, improving trust in emissions data and providing a definition of ‘sustainable’ would resolve the many issues climate-related disclosure currently presents to infrastructure stakeholders: the quality and transparency of climate-related disclosure would improve, increasing investor confidence and allowing for more low carbon, net zero aligned infrastructure investments to be signed off.
In conclusion, KPMG recommends that firms invest in scenario analysis and emissions data collection to strengthen the quality of climate-related disclosure, improving operational resilience and accelerating the transition to net zero.
This blog post is taken from a longer piece of work capturing the roundtable discussion. Please reach out to a team member below to view the full version.
* United Nations Environment Programme, 2022, Emissions Gap Report.