Prudential PLC (LSE:PRU) said it is investing US$350 million in two climate transition funds focused on Asia and emerging markets, but warned that the emissions related to its portfolio may initially rise as its energy transition 'framework' encourages investment in hard-to-decarbonise areas.
Two 'whitepaper' documents were published to set out the new climate transition framework of the FTSE 100-listed insurance giant, one co-written with its asset management arm, Eastspring Investments, focused on the climate transition approach in capital markets.
A principal tenet of the framework is that, in addition to financing purely ‘green’ activities, the companies believe "financing the transition from ‘brown-to-green’ will be crucial for the global climate transition, especially in emerging markets".
This means investing in hard-to-decarbonise sectors and pursuing "active engagement" with companies there.
"This approach will mean that the emissions related to our investment portfolio might increase in the short term," the whitepaper said.
"While this may challenge our decarbonisation progress in the near term, we will accept this short-term impact, and highlight this to our own stakeholders, as we believe financing ‘brown-to-green’ will be essential."
Pru argued there was a "need for flexibility with regards to emerging markets in Asia and Africa", including backing companies in carbon-intensive sectors in emerging markets that are significantly reducing emissions intensity.
Eastspring's chief investment officer, Vis Nayar, said "Climate goals cannot be reached if we ignore transitioning companies (brown-to-green or brown-to-less-brown) - which are committed to emissions reductions and are progressing towards climate-resilient business models".
Current industry guidance on transition, Nayar said, is "mainly principles, emissions or activities focused", so his team developed the framework which "proactively identifies such companies across markets and sectors", which "widens the investible universe and will allow investors to identify potentially mispriced assets".
The frameworks have been endorsed by the Climate Bonds Initiative, following a technical review, which said "the global transition needs to be credible, ambitious, and rapid" and such frameworks enable asset owners and managers to help with "aligning economies with net zero pathways and avoid portfolio risks like emissions lock-ins".
In line with the launch of the financing the transition framework, Prudential said it will invest US$200 million as one of several founding investors in the new Catalytic Transition Fund from Brookfield Asset Management (TSX:BAM.A), which is raising $5 billion to invest in clean energy and 'transition assets' in South and Central America, South and Southeast Asia, the Middle East, and Eastern Europe.
The other US$150 million has been committed to a climate-focused strategy managed by private equity giant KKR making infrastructure equity investments in Asia focused on the energy transition, including climate adaptation, climate mitigation and the brown-to-green transition.
Pru's chief financial officer, Ben Bulmer, said the group's presence in emerging markets "gives us a unique voice on responsible investment" and "we use this opportunity to influence industry, peers and investee companies to consider the role that emerging markets must play in the global energy transition".