He said the International Energy Agency has estimated that to achieve net zero emissions by 2050, global investment in the energy sector alone needs to grow to about $5 trillion annually in less than a decade. The absence of consistent financial reporting has made it difficult for advisors to fully engage, so advisors and investors have had to anticipate the impact on markets and the economy.
“For capital markets to be part of the solution to addressing climate change, I say they need two ‘Is’,” Meng said. “The first is information and the second is incentive.”
On the information front, Meng said capital markets and investors need investment grade climate risk data so that they can perform the necessary risk and return analysis.
On March 21, Meng said the Securities and Exchange Commission issued a draft resolution on making climate risk data disclosure mandatory for public companies. It will only have a 60-day comment period, but will soon follow the International Financial Reporting Standards initiative to create climate risk reporting standards. Templeton believes that the disclosure of public companies on important issues such as climate risk reporting could revive capital allocation in the sector.
Meng said the second missing piece is incentives and that countries need to eliminate subsidies for the fossil fuel industry and then have a carbon pricing scheme that “pays the polluters for the problem”. This could include something like when the European Union began imposing a border carbon tax on everything imported following data disclosure on each product. This can have an impact on the entire economy as people realize they must reduce carbon emissions.