Page 23 – Top1000funds.com

The strength of China’s national leadership has been and will remain a central topic for avid China watchers around the world. As the nation heads into a structural reshuffle of its economy, investors, researchers and political scientists have different views on Chinese policymakers’ ability to work with the financial market from this point on.

At the Top1000funds.com Fiduciary Investors Symposium earlier this month, Logan Wright, China markets research partner at Rhodium Group, said Beijing’s lack of policymaking actions so far on several fiscal and economic issues is a worrying sign.

“Some believe there’s an awareness of the problem,” he told the delegates in Singapore. “There’s a belief that the [Chinese] leadership can basically counter some of these structural challenges when push comes to shove.”

“I’m a little more skeptical of that argument at this point, given what we’re seeing at this stage in Chinese economic policymaking.”

A case in point is the local government debt, which is at an historical level right now in China, Wright said. Reuters reported that the debt has reached 92 trillion yuan ($12.58 trillion) in 2022 – 76 per cent of the country’s economic output in 2022, up from 62.2 per cent in 2019.

China held its Central Financial Work Conference in November 2023 (which itself was delayed for over a year) and was supposed to discuss measures to put the debt on a more sustainable path. However, there were no concrete announcements apart from fleeting media reports on potential refinancing plans for local government financing vehicles.

“You can’t do nothing, and you can’t keep doing exactly what you have been doing in the past to fund local government investment. This is the conundrum that Beijing is facing,” Wright said.

“But the answer we’re getting is silence.

“We should now be questioning the capacity of policymakers and whether they really are aware of the challenges that are being faced, and if they do, why these solutions keep getting punted down the road.”

Confidence issue

However, think tank scholar Cheng Li disagreed and argued that despite various critical opinions, the Chinese leadership is “in relatively good shape”. Li is the Professor of Political Science at University of Hong Kong (HKU) and the founding director of its interdisciplinary think tank, the Centre on Contemporary China and the World.

That is because first and foremost – different from what the Western media tends to portray – there is no major conflict within Chinese leadership, Li said.

“Of course, factions of parties existed in China, but it’s not out of control at the moment. Otherwise, the so-called Xi Jinping’s monopoly power is just a contradiction,” he said.

“I emphasize that we cannot understand Chinese leadership’s mindset without putting China in the global perspective.

“In that regard, some would say the problems mentioned about China is also global to a certain extent. We talk about China’s local debts – what about debts in the US? In Japan? Different nature of debt, but even higher [levels].”

Addressing the World Economic Forum in Davos earlier this year, Chinese Premier Li Qiang portrayed the nation’s ability to deliver strong GDP growth without resorting to “massive stimulus” as a point of pride. Despite the mounting deflationary pressure, he said China “did not seek short-term growth while accumulating long-term risks”.

But HKU’s Li said this is not an indication that the government is unwilling to act or that a stimulus package is completely off the table, but that the nation’s leadership needs time to first determine whether it’s the right thing to do.

Looking into the next three to five years, Wright said the slowing economic growth prospect is very real in China. The lack of fiscal revenue is one key reason.

“[China’s] 17 per cent of GDP in fiscal revenue is the low end of the OECD, which has an average of 34 per cent. The US has 27 per cent,” he said. “Those are real constraints in terms of how China will meet its ambitions.”

“I think it’s very difficult to think about growth much above 3.5 per cent in the medium term.”

Li agreed that the environment is not ideal in China but emphasized that apart from pure economic factors, investors are also concerned with security and stability.

“China is among the very few countries that can claim it can maintain stability, even though that stability is because of Chinese authoritarianism,” he said.

Li said his personal observation interestingly revealed that while there is a general pessimism among Chinese elites, the wider public tends to be more optimistic about the nation’s economic status. Around the world, the recent Chinese equity rout probably lowered confidence towards the nation further for some, but Li remained steadfast.

“If confidence or policy are the real problem, don’t you think it’s relatively easy to fix compared to serious structural problems like environment or security?

“That’s the reason I’m optimistic of China. I know that I’m a minority overseas and a minority in China, but I want to make sure that side of story is heard.”

Investing in Asia poses an ESG dilemma that investment in other regions throws up less frequently, namely, that most manufacturing companies there derive the energy needed to run their operations from high carbon-emitting sources, principally coal.

This inconvenient truth was just one of the challenges posed for investors in the region, outlined during the Fiduciary Investors Symposium in Singapore last week.

Khazanah Nasional head of strategy and asset allocation Wai Seng Wong said the $27 billion Malaysian sovereign wealth fund has always had a home bias, “and home, in this case, is not just Malaysia, but a preference and a comfort with China and India and everything else around us”.

But this home bias presents challenges for the fund’s ESG and sustainable investment aspirations.

“When we speak of the…manufacturing sector, the biggest elephant in the room is a source of energy, actually, in this region. It’s mainly coal,” Wong said.

“And no matter what you do, the moment you allocate to southeast Asia, or Asia, your ESG scores will pretty much go sideways.

“That’s the reality of the region.”

“Our challenge in the portfolio is we are very heavy emitters. We have an energy utility company. We have airlines, we have airports, we have construction. And all of that is really the focus for us, in terms of decarbonisation, and transitioning away.

Wong said fund applies a two-prong strategy to managing the issues.

“One, you go ahead of the curve, take a look at reducing your portfolio emission through investing in green energy, investing in anything that reduces your emission,” he said.

“Or, the other approach is go with the flow, the world will decarbonize on its own, chill, relax, let’s just go with it, because the West is doing that so we just buy those stocks,” he said.

“It really depends on your ambition, but also depends on your targets, and also what’s inherent in our portfolio.”

Wong said the find doesn’t take an either-or approach to its portfolio, it does both.

“On infrastructure, and renewable energy and all of that, we take the more proactive approach to decarbonize the portfolio,” he said.

“But on the other side – where we perhaps have less control and perhaps the market’s more mature, and [where] I say we can relax a bit more – will be out PE funds, will be our developed markets portfolio where, just by virtue of the fact that we go for quality, we will decarbonise and we don’t really have to focus so much.

“So really, it’s about choosing our battles.”

Temasek director of macro strategy MK Tang said Temasek works closely with its portfolio companies to understand their aspirations and actions on sustainability; and internally, it factors in a carbon price of $50 a tonne when assessing potential investments.

“We expect that to go up to $US100 [a tonne] by 2030,” Tang said.

“And then one other thing, very important that we do is essentially try to think about sustainability in a holistic kind of way,” Tang said.

“What that means is that we do not just invest in green companies. There are a lot of non-green companies out there. We also evaluate companies in terms of the vision, in terms of their plans, in terms of the clarity of being a less significant emitter of carbon going forward. We evaluate those companies in those terms as well.”

Tang also said that while demographic trends are well established, the impact of those trends has shifted over time. Two decades ago, the Baby boomers were ageing from youngsters to 56 years old.

“But now, going forward, the aging that we’re talking about is slightly different, because those people are aging into retirement,” he said.

“In that case, they have to dip a little bit in the nest egg; they have to dis-save. What that means at the macro level is really that potentially we can see an inflection, pretty significant changes in the consumption and savings dynamics going forward.

“And that could potentially add to a lot of other structural factors that…actually could push up structural inflationary pressure going forward. What that means, and what that brings is higher structural real interest rates.”

Tang said that as an asset owner “high real interest rates are really great”.

“The challenge, obviously, is that for companies that are less proven, they have less cash flow. The valuations and also the financing opportunities could face a lot of headwinds when real interest rates are high.”

Tang said that for long-term investors “that’s really a key”.

“What we try to do, of course, [is] manage technical risks, but we also try to ride out short-term storms,” he said.

“It’s exactly in things like this where a lot of green companies that actually are not proven to be successful companies yet in terms of commercial returns, we stay very focused on the longer-term prospect, on the longer-term returns, as well as impact.”

Brunei Investment Agency acting chief investment officer Su Tengah said the home bias issue the agency faced was quite different – it has invested since inception without a home bias because there wasn’t a home market to be biased towards.

But expanding its portfolio to cover other markets and widening its asset allocation has presented some other challenges.

“Our reserves were mostly invested in developed countries,” Tengah said. Initially investing mostly in public markets, it has since expanded to encompass other asset classes.

“Ten years into the establishment of BIA, our predecessors then started amassing a big real estate portfolio all around the world,” Tengah said.

“The big push for alternatives in BIA really didn’t happen until recently, not until the post-QE era.”

Tengah said the agency is now expanding into other geographies and asset classes but its size – while its assets are not publicly disclosed, BIA has a relatively small investment team – means it must be selective about how it grows.

“Everyone has a different context,” Tengah said.

“Upon reflecting, I realized ours was more a structure issue. We had a very small team. People didn’t really specialise, so we could only at any one point in time focus our efforts on one thing.

“And so actually in building out Asia, or in building out VC, we were always cognisant that we had to be sequential, because we couldn’t be in all places all at once.”

“We just had to be sequential and start where we thought we could first be more effective and evolve the exposure towards our asset allocation.”

Tengah said BIA looked at “things that we didn’t have a lot of in the portfolio, and these were technology investments so we also started building out our venture program”.

“And then, as an extension to that, we also pivoted to growth and growth infrastructure,” she said.

“We would funnel pipelines for our growth investments through our venture managers, and then also growth as a thematic, growth and growth infrastructure. There’s just a huge need for it, especially in this region, whether that’s digital or for decarbonisation efforts, so more investments going into that.”

Tengah said BIA also started down the ESG path.

“We didn’t really have proper frameworks, but we just wanted to start,” she said.

“And I think bottom-up that theme is clearly coming out of each and every one of our portfolio managers’ ideas and investment books.”

Tengah said that even though investing in China can be challenging in, “the preface of investing in China for us has changed”.

“Now, opportunities have opened up and investors do need to embrace Asia, in its diversity and its entirety,” she said.

Tengah said there are opportunities emerging in Japan, even if it remains relatively expensive; and in southeast Asia and Korea “maybe opportunistically”.

Leading sustainable finance researcher has urged global investors to maintain a critical mindset when approaching an asset class’s green certification, saying that buying into sustainability claims blindly can undermine both the investment’s returns and the ultimate societal goal associated with it.

Sumit Agarwal, Low Tuck Kwong Distinguished Professor and managing director of the Sustainable and Green Finance Institute at National University of Singapore (NUS), said while investors are keen to put money behind responsible assets, most know little about the implications of green certification. And real estate is one asset class at the epicenter of this problem.

With a research interest in household sustainability, Agarwal led a study which examined the water consumption data for every apartment and commercial unit in Singapore between 2011 and 2020. His team also garnered the electricity consumption data for most residential buildings in Singapore.

Around 55 per cent of Singapore’s buildings are certified under the nation’s Green Mark (GM) scheme – a rating system designed to evaluate a building’s environmental impact and performance – and the target is to increase that to 80 per cent by 2030.

However, Agarwal’s team found that, worryingly, the household utility consumption level actually increases 3.3 per cent after the building’s green certification. He told Top1000funds.com’s Fiduciary Investors Symposium that the phenomenon could be caused by a wealth effect.

“What is driving the result is because after the building goes through this Green Mark certification process… the unit apartment price goes up by on average 2 per cent.” he told the delegates in Singapore.

And because renters don’t benefit from the property price increase, their energy consumption does not increase like homeowners in these buildings.

This discrepancy between the GM’s intended usage and its actual implications can lead to unintentional greenwashing for investments, Agarwal said.

“Unless we fix this kind of loophole, we are actually misleading the investors, and we’re misleading the regulators in the value of this Green Mark certification process,” he said.

“When we uncover this kind of problems – unless we address them – these assets will be valued down.”

He added that the broader Asian region has much more work to do on the standardization and awareness of sustainable investments compared to Europe and North America.

For example, as of March 2023, there are over 5391 investors and service providers globally that have signed up as UN PRI Signatories – a pledge for organizations to publicly demonstrate their commitment to responsible investments.

Among them, 1076 are US signatories and 858 are from the UK, while China only has 136 signatories, 123 in Japan, and 262 in the rest of Asia. This is not to mention the absence of countries such as India and Indonesia, Agarwal said.

“One reason is most of these countries don’t even want to address this [problem]. If you ask where India is on net zero, India says we will only try to address that by 2070. If you ask China, they will say 2060, while countries like Japan and Korea are saying 2050,” he said.

“There is huge variation in Asia on what countries put their priorities on. Because they are saying it’s not lives, but livelihood, that we care about right now.

“Livelihood is more important right now for us to grow – to reach that point where we can think about sustainability as a key focus.”

Regarding suggestions that wealthier countries may have to subsidize developing regions when it comes to solving climate change issues, Agarwal said organizations such as the World Bank’s International Finance Corporation are already working with the private sector to develop bonds used to finance relevant areas. But there are also risks in this solution.

“Think about Indonesia – the country has relied quite a lot on coal. These coal contracts have been written for the next 30, 40 years and these assets will be stranded if we don’t finance them.

“People have not been thinking about the legal actions the owners of these mines will take against the country and against the financial institutions if you strand these assets.

“We have to be mindful of the legal aspect when we’re pushing [the subsidy] hard.”

The specific drivers of growth for Asian economies means a traditional view of asset allocation is not necessarily the best way to approach investing in the region, the 2024 Top100funds.com Fiduciary Investors Symposium in Singapore has heard.

GIC senior vice president, total portfolio policy and allocation, Grace Qiu told the symposium that the backward-looking nature of benchmarks means that they may not necessarily be the best guides when assessing the potential of developing markets or regions.

Qiu said investors on the ground can often make better decisions.

“Benchmarks may be the best simple and transparent rule-based solution you can come up with in a single asset class. But in a total portfolio context, some of these important decisions can be made by ourselves.”

“As investors, we know the investment objective, the time horizon, and the risk tolerance. So, we should potentially take those decisions in-house, and make the right allocation accordingly.”

Qiu said that in emerging markets “the benchmark may potentially be even worse than…in developed markets”.

“Because [the benchmarks] are backward-looking, they’re not really reflective of the true [reason] why we allocate or invest in emerging markets,” she said.

“For us, making more granular decisions on not just the asset class, but also regional allocation, in a consistent manner across the total portfolio is an important task for asset allocation.”

Pictet Asset Management senior investment manager, multi asset Andy Wong agreed that asset allocations based on benchmarks are by definition backward-looking.

“Your variance, covariance matrices [are] mostly backward-looking,” Wong said. “Also, it is quite arbitrarily confined. People say the US economy is doing well, you should buy S&P 500. Actually, half of the revenue is from overseas.”

Wong said he has “a strong view that the semiconductor is the foundation of modern technology”, and being located close to supply chains for major manufacturers provides a useful perspective.

“Understanding some of the bottlenecks, understanding some of where the new technology is going to will help us think about where the world actually globally will be heading next,” Wong said.

Wong said investors shouldn’t use today’s use-case – which might be reflected in current benchmarks – to try to assess the investment potential of technology.

“When Apple was at $200 billion market cap, people were saying that even if every phone in the world is an Apple phone, they were overvalued. At $2.6 trillion today, quite clearly, it’s more than just a phone call machine; it is connectivity, it’s ecosystem, it’s productivity, it’s GPS, iPod, everything in one. All of these things we couldn’t imagine from before.”

Wong said asset allocation needs to be “a little bit more nuanced”.

“You need to look at fundamental drivers,” he said. “If you want to understand risk, you need to understand equities. If you want to understand equities, you need to understand US equities, which is 70 per cent of the market now.

“And then you need to understand Magnificent Seven, you need to understand AI, you need to understand semiconductor. So, from our perspective, themes and ideas are an integral part of asset allocation.”

Senior managing director, chief investment strategist and head of Singapore, AIMCo (Singapore) Kevin Bong said that from a portfolio construction perspective “diversification benefits; differing sector compositions; different stages in the economic and market development cycle; differing political, economic, and policy cycles; they all mean that the investment markets will not be perfectly in sync with what is I think, typically a developed market-heavy portfolio, and most of us have”.

“You could argue that some of it is an unfortunate side effect of slowing or a reversal of globalisation,” Bong said.“But I suppose if the markets give you lemons, you make a lemonade portfolio.”

Bong said that it is “admittedly more aspirational than a reality, but there is always alpha potential in new markets”.

“One could argue that active management opportunities are attractive across the Asia Pacific region, in part because the markets are not as efficient for the most part, but also because there’s meaningful dispersion in the region,” Bong said.

“All of that sums up to a picture where, especially for where we’re starting from Asia is an attractive opportunity.”

Qiu said asset allocation “needs to adapt to the new environment, to the new regime; and under the new environment asset allocation we believe at least, should be more flexible, more deliberate, and more granular.

“What is the next frontier? What is the newest area of innovation in asset allocation that we can think of to actually bring our portfolio to the next step?

“Those activities lie in some of the maybe more traditionally called bottom-up or more granular type of activities that doesn’t necessarily fall into traditional asset allocation mandate or asset allocation job description.”

Growth in prosperity and wealth across Asia isn’t a foregone conclusion and will only be a result of deliberate decisions and choices by policymakers and companies, the 2024 Top1000funds.com Fiduciary Investors Symposium has heard.

Future Fund director of research and insights Craig Thorburn told the symposium in Singapore that Asia’s destiny won’t happen by chance.

“One of my favourite quotes is: ‘Destiny is not a matter of chance; it’s a matter of choice[1]’,” Thorburn said.

“Asia’s destiny is not just going to be driven by its demographic pyramid. It’s also defined by the policy choices that the various leaders of these very different countries are going to be making. That is crucially important.”

Thorburn said the success of Singapore has come about through choice.

“When you look at potentially the success of India, and I would argue the last 10 years is a very good example of that, it has been done through successful incremental choice,” he said.

“When you look at what’s happened with China in recent years…part of that has been a matter of choice when it comes to the policy choices that the regime has put in place when it comes to its entrepreneurial society.”

Thorburn said investors should always bear this in mind when considering underlying fundamental issues such as demographics.

“You should have a bias towards deploying more to [Asia], but my one advice is always remember that…quote about destiny: it’s a matter of choice, not a matter of chance,” Thorburn said.

Thorburn said the $A212 billion Australian sovereign wealth fund currently has about 30 per cent of its total portfolio invested in Asia, which includes Australian exposure because “I do consider Australia as Asia” but does not include Russia because “we don’t own Russia”.

“I do believe that all of us should have a bias in our thinking around how do we look towards increasing our Asian exposure.

Constrained by the universe

Hong Kong Monetary Authority chief investment officer of asset allocation Joe Cheung agreed that “the future is Asia” but noted that as things currently stand, institutional investors are constrained by the investable universe.

“Currently, Asia still has much smaller market cap in the listed market side,” Cheung said. “And if we want to invest more in in Asia, now we have to make quite an active decision to overweight Asia.

“I’m sure, over time, the market cap of Asia will grow mainly through all the new listings, for example, in the public market; and also through more investments available in the private market,

“But currently, it is still quite a small proportion in our portfolio. And it’s very hard to make a conscious decision to overweight, to allocate more to Asia, because that’s an active decision that we are accountable for.”

Cheung said investors are entering a new regime where a recent focus on risk will be replaced by a closer focus on returns.

He said that between 2009 and 2020 the cash rate in the US was close to zero and no more than 1 per cent in 10 of those 12 years. He said this dragged down the whole yield curve.

“If you look at bond yields, in those 12 years the average, say, 10-year yield was something like 2.3 per cent, while inflation was close to 2 per cent,” he said.

“For most institutional investors [with], say, a typical 60/40 total portfolio, a lot of money is tied up in safe assets – government bonds, and so on. If you look at a large part of your portfolio not being to earn a real rate of return, of course you worry, and you would make some changes to deal with that.

“We take on more risk, right? So that’s the easiest way we can handle that low interest rate regime.”

Taking on more risk

Cheung said that in fact that’s what institutional investors did, with some analysis suggesting fixed income exposures were cut on average by as much as 15 per cent, equity exposures increased by 5 per cent, and exposures to alternatives including private equity increased by as much as 10 per cent.

Cheung said investors also employed strategies such as risk parity, which involved leveraging bond exposures and some equity exposures to increase returns.

In a regime where institutional investors have been increasing risk, and using some sort of leverage in order to earn a return, the focus naturally has been on returns.

“In the coming regime, most of us would agree that the level interest rate is not going to go back to near zero for a while,” Cheung said. “So for us, at least, we are earning a real return on our safe assets. And in that sense, the focus going forward will be back on risk rather than on return.”

Cheung said this would cause investors to rethink leverage-based strategies “because the cost of funding is no longer low”.

“And also [they] will revisit whether it makes sense for them to have more equity,” he said.

“That’s the biggest thing we are thinking about in terms of the changing regime, because of the changes in the level of interest rates.”

Thorburn said that in the past 18 months the A$212 billion ($144.3) Australian sovereign wealth fund has reallocated about A$70 billion of assets, with about $A7 of that reallocation away from hedge funds and towards mostly investment-grade credit.

“The reason for that is quite simple: we’re being paid for it,” he said. “For a long time, we haven’t been paid for that, and we haven’t seen conditions as attractive as this probably since the GFC. For us, it was a bit of a no-brainer to deploy into it.”

Thorburn said the decision to allocate away from hedge funds was driven by a desire to simplify the portfolio.

“We actually really like hedge funds – always have, always will,” he said.

“But they do add complexity to your portfolio, and in a world where you’re not quite sure – is it supposed to zig or is it going to zag? – you probably want to reduce that level of complexity in your portfolio. And that’s what we did.”

Thorburn said the fund didn’t have the luxury of reducing its bond allocation because it is already very low.

“Our bond exposure is done through derivatives,” he said. “We do have bond exposure, but it’s quite small in the general scheme of things. We also didn’t want to reduce our equity exposure, because we have a very aggressive risk target that we have to hit: Australian CPI plus 400 to 450 basis points is an aggressive target.

“If we’re going to reduce [equity exposure] even more, and it’s less than what some of you in this room would have, we need to be very careful if we’re going to make that decision.”

[1] “Destiny is not a matter of chance; it is a matter of choice. It is not a thing to be waited for, it is a thing to be achieved.”
– William Jennings Bryan (1860 – 1925)
https://www.pbs.org/wgbh/americanexperience/features/wilson-william-jennings-bryan/

Working out which companies have a viable transition path to net zero is a complex task for investors. When it comes to figuring out how a company will get there and how their transition will be financed, more investors are making a distinction between emissions that are hard to abate, and emissions that are expensive to abate.

As a growing number of investors make net-zero pledges, they are not only faced with the job of setting a strategy to achieve that goal, but they’re also faced with answering some fundamental questions about the companies and businesses they invest in, and what it really means to implement a net-zero strategy in practice.

The 2024 Fiduciary Investors Symposium in Singapore last week heard that it’s not a simple task to assess a company’s potential transition to net zero, the technology that might be required to support it, and the role of asset managers in financing the transition.

Norges Bank Investment Management global head of active ownership Wilhelm Mohn (pictured) said investors can’t just focus on companies in a portfolio that are leaders or laggards on transitioning to net zero, “it’s everything in between”.

“A lot of these sectors, as you can guess, are those hard-to-abate sectors, and we expect the transition to be a transition over the next 20 years,” he said.

However, he said that the $1.5 trillion asset owner is now thinking “less about ‘hard to abate’ and more about ‘expensive to abate’” emissions.

“In terms of most of these sectors, the technology and the solutions are there,” Mohn said. “It’s more how you essentially finance it, and how we also as investors can be supportive for long-term decision making.”

Bridgewater co-chief investment officer, sustainability, Carsten Stendevad, said the “hard or expensive” perspective is “a very, very insightful way of putting it”.

Stendevad said Bridgewater research suggests that around 40 per cent of current emissions can be abated using existing technology.

“We have the technologies, we have even sometimes mature technologies, we just have to implement them at scale,” he said. “It will, of course, require capital, but it will require, I would say, ‘normal’ risk capital.

“Then you have the remaining 60 per cent of emission reductions, where the technology is not quite there yet, either because, literally, we don’t have the technology, or because it just hasn’t been proven at scale, or…it’s too expensive. And so, this needs a different type of capital.”

Stendevad said green capital and venture capital is attracted to this type of opportunity, but “the amounts that are needed are so big, and the risks are still quite significant that that’s really the part of the system that is the hardest to make work”.

Stendevad said that making informed decisions on whether a company is doing what it said it would do to transition to net zero, or whether it can even do it, is “such an important question”.

“The starting point must be a fundamental understanding of how a company is related to real-world emissions, whether that be its operations, its energy consumption, its supply chain, its products – in other words, really a comprehensive understanding of scope, one, two, and three [emissions],” Stendevad said.

He said companies fall into three buckets: low-emitters; climate problem solvers; and high-emitters.

He said low emitters do still need to reduce emissions but can do that mostly by switching to renewable energy sources. He said about half of global equity market capitalisation is made up of low-emitting companies.

“So you can kind of think of them as not really part of the problem, not really part of the solution,” Stendevad said.

Climate solution companies are those whose products and services – either accidentally or by design – mitigate climate change.

“That could be, of course, green energy producers; it could be EVs; it could be green tech; and that represents something like 5 per cent of market cap,” Stendevad said.

The remaining companies – close to half the capitalisation of global equity markets – are high emitters, and “this is where the problem is,” he said. “The big question here is, are these high-emitting companies transitioning, or are they not? That’s very much the epicentre of the challenge.

“The whole challenge of net zero is to figure out which of these companies have a credible way of…transitioning their business model.”

Stendevad said Bridgewater’s analysis suggests high-emitting companies that have a credible path to net zero account for about 20 per cent of global market capitalisation – in other words, about half the current population of high-emitting companies has a credible path to net zero, and the other half does not.

Stendevad said investors need to answer fundamental questions before making any decisions to back a company’s net-zero transition plan: is it technically feasible, is it financially feasible, does the company even want to change, and what are its achievements to date?

As much as 40 per cent of global emissions are created by the real estate sector, and Cbus chief executive Kristian Fok said members of his fund – which has its origins in the Australian construction and building industries – work in a sector “that has a huge contribution to carbon, but also has a huge potential to contribute to the reduction in carbon”.

Fok said that as a member of the Materials and Embodied Carbon Leaders Alliance (MECLA), Cbus is looking at “the components that will go into reducing the carbon footprint in terms of the buildings that you construct”.

“It’s how do we stimulate green steel? How do we stimulate zero emission concrete? How do we think about design, timbers, and things like that.

“In a sense the easy bit’s done, which is the trying to make it net zero from an operations point of view. We now need to tackle the harder bits. But the value becomes in the tenants and now moving to saying, OK, it’s not just the operating footprint, it’s actually the footprint of the development that we’re going in. So there’s sort of a race to the top.”

Fok said the fund is aiming to put its money where its mouth is and one of its current commercial property developments is aiming for a level of embodied carbon 30 per cent below the current benchmark.

“From a cost point of view it’s quite interesting, because it is more costly to construct,” Fok said. On the other hand, because it’s an attractive building to work in because of its environmental credentials, lease incentives paid to tenants are lower.

“The other thing is that we’re able to issue green bonds,” Fok said. “We just recently issued a billion dollars of green bonds against the portfolio, and they’re a lower cost of finance. So, we’re seeing the whole ecosystem continue to evolve to try and encourage that innovation.”

Assessing the potential path to net zero and its impact on a company is complex enough even where a manager has made an active decision to invest. But for an asset owner like NBIM, which by virtue of its sheer scale owns about 1.5 per cent of the world’s total equities, the task is immeasurably more complicated.

Mohn said even though the bank is “a largely passive investor, and largely invested everywhere forever” it has an active program of engaging with companies it invests in.

“It’s probably the most important thing we can do, it’s most important from a standards development point of view,” he said.

“That’s how you get, you can call it, sustainability beta, if you will. We target a 3 per cent real return for the portfolio, and that’s how you get it on the long-term. We believe we have an inherent interest in sustainable development.”

Mohn says “it’s really important to start with that piece of the puzzle, and then it comes to the companies and that’s very different, it’s very different game”.

“We have to prioritize,” he said. “We think about the exposure, the companies, and then think about the actual management of it, and then the performance. Based on that, you can [rank companies].”

Mohn said that for net-zero targets in particular, NBIM has developed a Climate Action Plan that sets “an ambition for our companies to have operations aligned with net zero by 2050”.

“That means having targets by 2040,” he said. “For high emitters we expect them to set targets already. And we’ve prioritized our top 70 per cent of financed emissions, some 250 companies, those direct emissions, scope one and scope, two; and then the most important indirect emitters, that’s essentially bank and automotives, for more in depth dialogues where we are really seeking to not just ask the questions around governance and policies, but also understand the details of their long-term transition strategies.”

Mohn says NBIM has produced a document setting out its expectations on climate change, covering a range of sustainability topics and available publicly.

“But what we did with the expectations on climate this year is that we changed it quite significantly towards something that is very useful for a consistent and long-term dialogue with the company as it transitions,” Mohn said.

He said NBIM has some foundational expectations around board accountability and governance, setting targets and working in a science-based manner to assess timeliness of interim targets.

“And then we break it down [into steps]: where you start, and how as you go through essentially transitioning, and that’s worked out really, really well in company dialogues, and really allows us to pick and mix and match the level of maturity of the company,” he said.