The world is at “an inflection point” in climate investing, and at this juncture, investors need clearer information while corporations want more incentives to clean up their act, says a Franklin Templeton executive.
Should these two “I’s” be met, the market will experience “explosive growth” that is “much more authentic”, says Ben Meng, executive vice-president and chairman of Franklin Templeton Asia Pacific.
Citing CNBC, Meng highlights that a third of total assets under management (AUM) in the US carry an environmental, social and governance (ESG) label.
He cautions, however, that the labels on these funds may be misleading. According to the 2020 Barclays report ESG funds: Looking beyond the label, ESG-labelled funds are not really different from conventional funds in terms of holdings, risk exposures and performance.
In his presentation at the Franklin Templeton Asia Investor Forum 2021 on Nov 19, Meng called for mandatory disclosure of ESG-related data and private-sector capital to combat greenwashing. “Information has to be mandatory and it has to be regulated, similar to financial data now. It has to be reliable, timely, comprehensive and auditable,” says Meng, who holds a doctorate in civil engineering from the University of California at Davis.
Last year’s Aggregate Confusion Project by the Massachusetts Institute of Technology’s Sloan School of Management found “a large level of divergence” among ESG scores from six prominent data providers, says Meng.
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“Investors are confused because they don’t know how to reflect ESG considerations in the securities’ prices. Companies are confused because they don’t know how to improve their ESG performance,” he adds.
Then, there are the incentives. “We have to provide the capital market with the right incentives to attract the needed capital. The first step is to remove the disincentives, to remove subsidies to the fossil fuel industry, then adopt some form of carbon pricing scheme,” says Meng.
Boston Consulting Group (BCG) estimates that between now and 2050, US$5 trillion ($6.8 trillion) in new equity and debt investment is required each year to fund the transition of key industries like energy, transportation and manufacturing.
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To put that into perspective, the figure is equal to 5% of global GDP in 2020. “Secretary [Janet] Yellen estimated half of that, or US$2.5 trillion, will be needed in the United States alone,” adds Meng.
Horses to self-driving cars
Meng foresees “explosive growth” for climate investing through the case study of transportation.
“The transportation industry did not evolve following Darwinian gradualism. It actually followed another theory in evolution, which is called a punctuated equilibrium,” he says.
Horseback riding and horse-drawn carriages formed the “first equilibrium” in transportation, a period which lasted more than a thousand years, says Meng.
This was followed by internal combustion engines, which have been in use for about a hundred years.
According to Meng, the third equilibrium began in 2011, when Nissan launched its battery electric vehicle Nissan Leaf to commercial success.
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With global sales totalling 500,000 Leafs by December 2020, the transportation world is still in the midst of this epoch.
Creeping up just a decade into this era, however, is a fourth age: the autonomous vehicle. “With each equilibrium, the duration gets shorter and shorter, with disruption happening faster and faster,” he says.
“From history, we see that the incumbents see disruption coming. However, they take incremental steps; they think the disruption will happen gradually.”
Similarly, the fight against climate change must involve drastic measures instead of gradual steps, says Meng. “Each inflection point represents existential risks, as well as opportunities.”
Covid-19 and the climate crisis
While organisations like the International Financial Reporting Standards Foundation figure out a unified reporting standard for ESG factors, what can asset managers do?
Across the various asset classes, the most practical asset to effect change is equities, says Meng, who joined Franklin Templeton in July from the California Public Employees Retirement System, where he was chief investment officer.
“I think private equity is better suited in providing the right climate solution, because the holding period is longer. You need an investment vehicle that has a longer horizon.”
Neither climate change nor the coronavirus respects national borders, says Meng. “It is a global problem that needs a global solution; no one has a place to hide.”
“But how we have collectively pooled our resources together, risen to challenges and developed effective vaccines in such a short time period is nothing short of extraordinary,” says Meng.
“Similarly, for the challenge of climate change, we need exactly the same playbook — data science, government policy and global collaboration. We did it in the ongoing pandemic and we can do it again with climate change,” he adds.
Photo: Bloomberg
