COP26 could take ESG investing to the next level, says family office founder
Family investors are well aware of the climate crisis and the role they must play to help combat it, but it is governments that must drive the change – and COP26 provides an opportunity for that to happen, a single-family office founder told AsianInvestor.
"I don’t think anyone in Asia disputes climate change, but they are leaving it up to governments to figure out what can be done to alleviate the problem,” said single-family office director Tuck Meng Yee of JRT Partners in Singapore.
“To me, it’s pretty simple. Anything for the greater good has to come from the government. It’s no good leaving it to the public to figure out,” he said.
Meanwhile, global heads of government will try once again to provide leadership on the issue at the COP26 meeting in Glasgow, beginning on November 1.
The G20 countries have so far failed to meet one of the key commitments they made in the landmark 2015 Paris Agreement: to provide $100 billion of funding for carbon reduction initiatives while working to transition away from hydrocarbons.
Six years later, the world is more aware of the issues at hand. In June, more than 450 investors with over $41 trillion in assets signed a statement urging governments to strengthen climate change policies ahead of COP26.
At the same time, investors are becoming more sceptical of the investment solutions being offered.
The fact that so many funds are now labelled green is only adding to the cynicism. There are any number of investments that can have a green lens attached to them, said Yee.
“Is it a green bond when it’s financing – [like] building a solar power plant that is owned and operated by a company that still generates most of its energy supply from coal?
“How do you classify that? On a project basis, the answer is yes, that’s a green bond, but from a corporate governance basis you’d have to say no, you are giving money to a company that still derives most of its revenue from coal.”
Yee added that green bond choices were limited in Asia. “In terms of green bonds and green financing it makes a lot of sense, but it has not become mainstream yet and the choice is fairly limited in the high-net-worth market, in this part of the world,” he said.
MORE THAN LIP SERVICE
Institutional investors understand that if climate change continues unchecked, the planet could well become uninhabitable for humanity in the second half of this century. A landmark report by the Intergovernmental Panel on Climate Change, released in August, said as much.
Nonetheless, Yee said he would like to point the family office towards climate investments that will make money, “to the extent there’s going to be government focus and a focus on technologies that enable a more sustainable environment, whether it’s electric vehicles or battery technology or sustainable infrastructure."
Recent reports have found that ESG investments can outperform traditional ones. For instance, a Morningstar report found that ESG indices outperformed their equivalents in 2020, although the industry is split on the reasons why.
Despite the promising opportunities, Yee agrees with other observers that there is also a level of apathy among investors besides the usual caution.
“While everyone and their dog is ESG-focused now, it’s actually quite easy to not have to change. I could take the attitude, for example, that the fund managers are doing my job for me. They are simply capitalising on the trend, so there’s no need for me to dig deeper.
"That’s a very superficial way of thinking about climate investing. Alternatively, you can dive in and really look at how ESG is integrated into a fund."
INVESTORS AT THE HELM
A report from the US National Resources Defence Council estimated that meeting the Paris Agreement goals via infrastructure investments in both clean energy and energy efficiency could provide $19 trillion worth of benefits to the US economy.
Energy transition industries and technologies would be major contributors, and hence where much of the public and private market investment is going. A significant investment pocket is also developing around nuclear energy.
The elephant in the room is fossil fuels. Developed and emerging economies are still reliant on coal, oil, and methane gas, with no sign of substantial change.
Curiously, the words fossil fuels, coal, oil, and methane gas do not appear in the Paris Agreement. COP26 is likely to bring this particular issue much more clearly into focus.
“That’s because you’ve got a legacy system that is going to be very expensive to change in the short term,” said Yee.
“It’s not just the US and China. Australia is the same thing. The reason why the Liberal party in Australia is so reticent to act on climate change is because they are beholden to the rural voters and the mining sector. They don’t want to lose political power.”
The Australian government is this week suggesting that it hasn’t decided whether to attend the meeting in Glasgow.
The biggest positive change has actually come from the investment community, particularly its largest investors, including Asia Pacific institutions such as Singapore’s GIC, Japan’s Government Pension Investment Fund, and New Zealand Super. Each has devised stress tests for their total portfolios that assess all assets on the basis of their environmental impact.
"GIC has done a lot of good work," said Yee. "You need government leadership to make it happen."