Climate vs Covid

Market update

Incoming inflation data continue to keep the subject in the market foreground, even if the price action within stock and bond markets suggest that investors remain sanguine in aggregate. To that end, there were few decisive moves within the major capital markets this week.

CIO review

One interesting debate doing the rounds at the moment is whether the pandemic could actually help galvanise the world on climate. As a blog this week from the IMF suggested[i] , there are arguments for and against. There are certainly some striking similarities. Those countries and segments of society that have fared worst over the course of the pandemic likely overlap with those that will suffer most from climate change – many of the world’s poorest countries are already clustered in the hottest zones on the planet. Today, they suffer from so far being granted only the vaccine scraps from the developed world top table. In decades ahead, if current temperature changes continue unchecked, it is these areas that will suffer the most deleterious blows to their economic and wider prospects.

Battling climate change effectively requires us to mobilise efforts long before the economic costs will become apparent. The fact that no country was prepared for the pandemic (some worse than others) in spite of multiple devastating outbreaks in the preceding years and persistent warnings from the scientific community and beyond, is surely a source for concern here. Many policymakers were only spurred into meaningful action after the economic costs began to rapidly accrue. Furthermore, like the pandemic, the battle to avert a devastating further rise in global temperatures requires global cooperation. The populist spasms of the last few years surely help explain some of the problems in generating the necessary co-ordinated global response to this crisis. The world’s scientists found a way to collaborate to break-taking results. However, the absurdly uneven distribution of these miraculous vaccines points to the improvement needed when looking at the fights that lie ahead.

Giving space and resource for science is clearly part of the answer on climate too. The development of scale carbon capture or negative emission technologies is a good example, as are the incoming and hoped for advances in battery storage. The precipitous drops in solar panel technology prices over the last decade light the way ahead. However, as with the Corona-crisis, the march of technological advance, however accelerated, is a necessary but not sufficient input. Behaviours, societal norms, and spending priorities need to be changed dramatically if the predicted temperature rises and accompanying descent into dystopia are to be averted.

Beyond the changes to our lifestyles, there are proliferating options for investors. We, like many of our competitors, offer our multi-asset class globally diversified exposure in a number of flavours. At the more activist end sits our ‘impact’ offering. This offers the chance not just to screen out those investments one might consider unsavoury, but to actually invest to positively effect change and profit from it.

The changes we continue to make to the broader proposition reflect the fact that there is less black and white in this area than much of the commentary would imply. At the heart of this is the key question on how I get my pound, dollar, or euro to have the greatest possible effect. Is it by denying emitters access to that pound??Or is the more effective strategy to carefully reward those emitters starting to move in the right direction??This can be augmented with an active engagement approach, as we employ, being sure the direction of the company is informed by a predefined set of our principles on ethics and climate change.

The next few years will see the investing options in this area proliferate. We will find out more over that time about the implicit trade-offs. We can see some evidence that investors are willing to accept lower returns in order to invest according to their principles.[ii] However, the industry is still working out how to incorporate this more effectively into a profiling and asset allocation framework that currently focuses more exclusively on the trade-off between risk and return. We also need to keep in mind that from the perspective of active management, it is often argued that the juiciest excess returns tend to lie in the less fished corners of the world’s capital markets. Flows data for this year is among the evidence suggesting that ‘ESG stocks’ are certainly not under-fished at the moment.

As with others, our proposition will evolve as the related options multiply. We will continue to carefully, deliberately move to incorporate the best of them into our investment offering. Our core mission will at all times remain the provision of rigorously constructed, stress-tested multi-asset class funds and portfolios that align to our carefully thought-out principles on climate and many of the other existential threats in the road ahead.

[i] https://blogs.imf.org/2021/07/09/what-covid-19-can-teach-us-about-mitigating-climate-change/?utm_medium=email&utm_source=govdelivery

[ii] Pastor et al. (June 2021) Dissecting Green Returns – Working paper 2021/70 – Becker Friedman Institute.

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*This article is for information purposes only. It is not intended as a product offer or investment advice.