Coal phase-out value chain presents investing opportunities for LGT despite coal exclusion policy
The asset management group can buy transition credits, thereby creating demand to develop a market for them
WHILE the early closure of coal power plants has been the priority of policymakers and sustainable finance practitioners in South-east Asia over the last few years, coal exclusion policies prevents Liechtenstein-based private banking and asset management group LGT from participating in these transactions.
However, the financial institution – which had US$375.7 billion of assets under management as at Dec 31 last year – is still able to invest in the rest of the value chain that may arise out of coal phase-out deals, said their executives in an interview with The Business Times.
As coal phase-out transactions are huge infrastructure projects, these are best led by multilateral development banks and development finance institutions as such entities are specialists in driving infrastructural change, said En Lee, managing director and head of sustainable and impact investments in Asia at LGT.
LGT, however, is focused more on growth, private equity and philanthropy – which tends to come in earlier – instead of transition finance, which consists mainly of debt-based capital, said Lee.
“The question is, as (the coal phase-out) trajectory develops, is there a possibility of having more retail or high-net worth clients come in? Absolutely. But it’s an evolution that we need to build the investable pipeline,” he added.
One such investable pipeline includes transition credits, which are generated when a coal plant is decommissioned earlier than its original retirement date and replaced with renewable energy sources. It is currently being piloted in two coal plants in the Philippines.
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If transition credits do take off, financial institutions like LGT could purchase them, thereby creating demand to develop a market for them, said Mariam Ashroff, head of sustainability management at LGT.
These transition credits could be put into a fund, for example, noted Lee. Funding is starting to go into transition funds, some of which could include transition credits, which banks can invest in.
LGT, which is owned by the royal family of Liechtenstein, has not invested in companies that mine coal or produce electricity from coal since 2020, and has set a target to have net-zero carbon emissions by 2030.
“The question is, as (the coal phase-out) trajectory develops, is there a possibility of having more retail or high-net worth clients come in? Absolutely. But it’s an evolution that we need to build the investable pipeline.”
En Lee, managing director and head of sustainable and impact investments in Asia at LGT
In addition to transition credits, LGT could also invest in ancillary enablers of coal phase-out through Lightrock, which is the group’s private equity platform that focuses on investing in sustainable businesses. This includes green hydrogen, green ammonia, biogas as well as carbon capture and storage, among other climate technologies.
“Some of these innovations will be ripe for helping decarbonise the value chain as transition credits and transition finance is starting to come across. It goes hand in hand,” said Lee.
While LGT has a coal exclusion policy in its investments, it recognises that divestment is not the only solution, even though it has a goal to reduce its portfolio emissions by 7 per cent every year.
An investment that has high absolute carbon emissions and emissions intensity may not necessarily be divested if it has a science-based emissions-reduction target, said Ashroff.
Fiduciary duty
“It’s our fiduciary duty to manage financial risk and climate risk,” she noted. “Transition is a financial risk. So the way we do this is, we allocate a carbon budget that reduces year on year as we get to 2030.”
She added: “The investment professional then can understand, ‘Okay, this 1 per cent of my portfolio is contributing to 20 per cent of financed emissions. Is this position worth it? Is the intensity with it? Should we be thinking about switches?’”
Lee noted that the sustainable finance sector in Singapore has matured very quickly over the last few years. The formation of the Singapore Sustainable Finance Association included not just finance professionals, but also academics, policymakers and corporate players.
While the sector has started the process of trying to better match financing solutions to the type of decarbonisation needed, there is still a need to mobilise more capital.
“I think regulators also often have the stick... The stick, at least for Singapore, has come in the form of disclosures. But disclosures are related for listed companies and usually the larger ones... But a lot of the activity has to be on the private side, where we think it’s very exciting, because Asia as an investment opportunity is really, in the venture capital and private equity stage,” said Lee.
The key is in trying to bring together the investable pipeline from the private to public markets.
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