More power to asset owners.
This time it really can be different
“We choose to go to the Moon in this decade and do the other things, not because they are easy, but because they are hard; because that goal will serve to organize and measure the best of our energies and skills, because that challenge is one that we are willing to accept, one we are unwilling to postpone, and one we intend to win” – JF Kennedy Oct 1962.
This time it is different …
The phrase gets over used but this time “it really can be different”. We’ve all seen the explosion in ESG & societal value focused funds on offer – this really is change on the asset manager side. Corporates and governments seem to be falling over themselves to announce net zero targets. But change is deeper than that. Asset owners increasingly see that they can use their capital to drive the net zero transition and make our economy greener and fairer.
A more active role for asset owners
The process has just begun, now mostly dominated by the larger investors, with tens or even hundreds of billions under management. But it’s starting to spread to mid-sized professional investors, private banks, wealth managers and family offices. The focus is still mainly on ESG scoring, exclusion lists and taxonomy alignment, but climate change, social issues, and net zero carbon are rapidly moving up the agenda. As they do so, there is a growing recognition that investing in Net Zero 2050 is complex.
Complexity goes beyond technology.
Many analysts make the transition to net zero sound easy – simply follow their recommendations! The reality is much more complex. With few exceptions, nearly all of the decarbonisation and green choices we face involve tough decisions, trade-offs and involve massive changes in consumer behaviour. Change is tough and its often resisted, even if it’s for the best. We need to understand the underlying political motivations, social drivers, & regulatory change to identify the winners and the losers. Its not just about the technology.
We need to change behaviours
Getting people to buy EV’s, switch away from fossil fuels for home heating, change what they eat and eventually fit into some sort of integrated supply/demand energy management system, is going to take time and require compromises. That’s why the most important part of the EU Green Deal will be the Just Transition spending. But even that may not be enough. Paraphrasing the quote from John F Kennedy at the top of the blog, it’s going to be hard to deliver only 2 degrees of warming, no mind hit the Paris Agreement aspiration of 1.5 degrees. But try we must.
Credit: Charl Folscher from unsplash
It’s not about individual stock calls.
Understanding the important thematic drivers doesn’t mean asset owners need to involve themselves in individual stock decisions. But it does mean that they need to be sure that investments truly contribute to delivering decarbonisation. And this means lots of detail is necessary to gain a deep understanding of what net zero 2050 really means on the ground. Questions need to be asked: how the transition occurs & over what time scale, what must companies in specific sectors do, which transitions are easy and which are hard, how progress is measured and what trade-offs must be made. In driving decarbonisation and a greener economy, engagement is much more important than use of exclusion lists and voting at AGM’s. There is no silver bullet. The process is hard work, but it’s worth it.
Two paths – one target
There are two paths to delivering net zero. The first & currently most popular, is focused on individual companies minimizing impact. So ESG scores and taxonomy alignment. But, its increasingly becoming clear, while this is a good start, this is not enough. Incremental change is not going to get us to net zero. The alternative approach, and the one we favour, is to invest in those companies that really make a difference. This means identifying companies that will replace fossil fuels, enable more effective and flexible electricity grids, enhance natural capital, transform agriculture and what we eat, change how we heat & cool our buildings and make our energy truly cleaner and greener.
Complex decisions and challenging trade-offs.
Which technologies and themes do I want to invest in, how much risk do I want to take and over what time period? Am I happy investing for the very long term, say out past 2030 or even 2040, or do I want to drive change faster? Do I invest in the new technologies or work with incumbents? Should I stay and fight for change or divest? If I stay invested, what exact changes do I need to see & when? What should be done with undesirable assets… remembering the buyer might have lower standards? And how do I feel about miners and even oil companies, given we will need a lot of raw materials to make decarbonisation happen. Plus, net zero 2050 and decarbonisation is not just about reducing CO2 emissions. Higher standards are needed for water use, biodiversity, pollution, supply chains and the treatment of workers & local communities. These actions will contribute to making business models truly sustainable.
A lot of research is available – almost too much
The good news is that there is a vast amount of good work and research being done on the net zero transition & ensuring a greener economy. We are amazed and overwhelmed at the sheer number of reports and publications being released every day. The bad news is little is focused on investing decision making, and the analysis is buried deep within massive tomes. Plus, much of it is contradictory. Plenty is influenced by commercial or political priorities aimed at promoting outcomes that help a particular company, industry, or government to maximise profits and well paid jobs with minimal real change. And of course, the nascent technologies involved mean forecasts and expectations continually change. Absorbing it all is simply beyond the time constraints of most asset owners.
We can help
We believe values are important in your investment decision making. But you need to clearly see how a fair return can be earned & only then can you make the difference you want to deliver. We have each spent close on 30 years in the investment industry looking at companies forecasts and aspirations, balancing them against the technological, political, social, and regulatory pressures that are driving change in our society. More recently, we have focused on sustainability as a theme, looking beyond what is happening now, to how things could be in three, five or even ten years. This gives us perspective on what is investable and over what time period. We also have a background in the practical world from our time in civil engineering & consulting; we know how hard it is to drive change or introduce new technologies. Most importantly, we can simplify, making issues and choices understandable. Since we don’t work for corporates, we don’t have the conflicts of interest common to the sell-side. This allows us to say, “in this case it looks like the emperor has no clothes”.
Finally, and very importantly, nothing in this blog should be construed as providing investment advice. For company and/or fund specific investing advice and recommendations, you need to look elsewhere. In more formal language, this blog does not constitute Investment Research as defined in COBS 12.2.17 of the FCA’s Handbook of Rules and Guidance (“FCA Rules”). See the end of this blog for links to important information and disclaimers.