Developing sustainability disclosure standards to help place $5 trillion per year for a decade
Advisors should get onboard and get ready for the coming "tsunami" of climate change investing because it’s rolling just below the surface and is expected to soon crest, according to Franklin Templeton’s executive vice president and chairman of the Asia Pacific.
“I use the analogy that what is coming is almost like a tsunami,” Ben Meng, who is also Templeton’s Executive Sponsor of Sustainability, told Wealth Professional. “When the tsunami is forming deep in the ocean, you don’t see anything at the surface. But, when it comes to the surface, it can be massive. So, as advisors, we need to position ourselves now instead of being too late.”
Meng urged advisors to get on board at this critical juncture – not just for the investment advantages, but because it’s the right thing to do for their children and grandchildren.
He said the International Energy Agency estimated that to achieve net zero emissions by 2050, global investment in the energy sector alone needs to grow to about $5 trillion a year in less than a decade. It’s been tricky for advisors to fully engage because of the absence of consistent financial reporting, so advisors and investors have had to guess at the impact on the markets and economy.
“In order for the capital markets to become part of the solution in addressing climate change, I say they need two ‘i’s,” said Meng. “The first is information and the second is incentive.”
On the information front, Meng said the capital market and investors need investment grade climate risk data, so they can do the necessary risk and return analysis.
On March 21, Meng said the Securities and Exchange Commission issued a draft proposal on making climate risk data disclosure mandatory for public companies. It will only have a 60-day comment period, but will soon be followed by the International Financial Reporting Standards’ initiative to build climate risk reporting standards. Templeton believes having public companies’ disclosure in place on vital issues, like climate risk reporting, could revitalize the capital allocation in this area.
Meng said the second missing piece is incentives and countries need to eliminate subsidies to the fossil fuel industry and then have a carbon pricing scheme that “makes the polluters pay for the problem”. This could include something like the European Union beginning to impose a carbon tax at the border on everything that it imports once there is data disclosure on each product. That could have a ripple effect on the entire economy as people realize they must reduce carbon emissions.
“I’m optimistic, but I’ve been there before, so I’d say I’m cautiously optimistic. Hopeful,” said Meng. “The reason I’m more hopeful is that, if you compare this to the pandemic, we’ve just developed vaccines, which would usually take ten plus years, in much less time and they’ve worked quite well.
“Climate change and the pandemic virus are similar in that they both present an existential risk to humanity and require data science and global collaboration,” he said. “We can do it. We just did it in how we got out of the pandemic. We worked collectively for the pandemic, so we can do it again for climate change, especially when there’s a sense of urgency that we need to collectively rise to the challenge.”