Ben Meng, Franklin Templeton
Investing in private equity is the best way to address ESG issues, according to Ben Meng, executive vice president and chairman of Asia Pacific at Franklin Templeton.
“Private equity is better suited than public equity in terms of providing the right climate solutions due to the longer holding period in private equity. To effect such changes in the long run, you need an investment vehicle with longer horizon as well as [avoiding] public scrutiny,” Meng said during the Asia Investor Forum held by the asset manager last week.
On the other hand, the public market is run by short-term investors who are looking at quarterly earnings, which forces public-listed companies to adopt short-term strategies in terms of managing their businesses, he added.
To drive climate transition, Meng believe a country must have sufficient capital, technology and policies, and induce changes in their citizens’ behaviour.
While many countries have ticked all the boxes, Meng thinks it is easier for Asian countries to make that change as most Asian economies are top-down economies, which makes policy changes more effective.
Asian countries also have a greater emphasis of collectivism than individualism, which makes a change in behaviour easier, he believes.
Nonetheless, the transition to sustainability investing is still facing a “lack of information and incentive”, said Meng.
The shortage of standards, data and analytics have caused significant levels of divergence among ESG scores for companies, which then deter investors from including ESG factors into their investment process and companies from improving their ESG performances.
ESG analytics are also less likely to develop as empirical researchers are confused, said Meng.
He noted that the International Financial Reporting Standards Foundation announced in March last year that it is establishing an international sustainability standard board.
“If regulators can set standards on ‘investment-grade’ data, the financial market will be able to and is incentivised to quickly develop analytic tools, benchmarks, and performance attribution systems,” Meng said.
The incentive to switch to renewable energy is also lacking now, and Meng called for governments to remove subsidies provided for fossil fuels and adopt carbon pricing to discourage greenhouse gases emission.