An inflection point

Commentators far more erudite than I have written cogently about the challenges and opportunities that we will likely face as we start a new decade. Many cite that low interest rates are likely to persist; central bank monetary stimulus will provide a support for many asset classes; political uncertainty and populism will continue. Yet global economic growth shows little sign of turning negative; if anything, we may be seeing a re-acceleration. Nevertheless the emergence of the coronavirus in China is a reminder that unexpected events provide a jolt to the complacent.

However a large number of opinion formers have been (rightly) focusing on the growing influence of environmental, social and governance (ESG) factors on investment markets. The emphasis on the climate emergency and what part the asset management industry can play is helping to find a solution is at the heart of much dialogue. It has, in my opinion, passed an infection point - or Tipping Point, to use a Gladwell-ism - when the momentum of the debate will not dissipate. This is a good thing.

The excellent Visual Capitalist helps to us to understand some of the issues involved (https://www.visualcapitalist.com/biggest-risks-global-economy-2020-environment/). It ranks Climate Action Failure as the biggest risk with the highest likelihood of failure in 2020.

It is perhaps therefore unsurprising that the recent WEF in Davos spent a good deal of its time discussing the issue albeit reports about the extraordinary number of private jets (https://www.telegraph.co.uk/business/2020/01/24/private-jets-undermine-green-agenda-davos-snow/) delegates used to travel to and from Davos provided an alternative and sobering reflection.

The political focus in the U.K. in 2020 will be substantial. COP 26 which is due to held in November in Glasgow will give the opportunity for UK politicians to show global leadership.

A common complaint that I hear from individuals is their inability to influence the debate themselves. They complain that any effort to reduce plastic use, buy electric vehicles or even recognise and act on flygskam (flight shame) doesn't move the needle.

Yet the more private individuals lobby their pension or wealth managers adding to the impetus that those enterprises will use their influence to change companies that they invest in. Meanwhile public protest of the type pursued by Greta Thunberg and, in general, via Extinction Rebellion attracts political attention.

And change is happening in investment markets. I heard recently of a major oil company that asked one of its advisors to measure the change in the number of 'mentions' of climate in shareholder engagement over the past five years. In 2016, it was barely a factor; but by 2019, the number of comments had risen to levels that the Board could no longer ignore. Moreover I understand the advisor expects the number of 'mentions' to double again in 2020.

Closer to home, I am excited that St. James's Place Wealth Management has communicated with all of the fund management companies that it works with indicating that we desire that they should become signatories to the UN Principles of Responsible Investment (UNPRI) by the end of 2020. This is a creating a higher hurdle for managers to overcome - and the intention is that the hurdle will rise every year - with a direct, realisable and concrete request. Towards the end of last year, the Investment Committee did not appoint a fund manager, who demonstrated many positive characteristics, because not only did they fail to realise the minimum ESG criteria set by St. James's Place, but it appeared there was little appetite to redress this short coming. Ultimately fund managers will be deselected by the Investment Committee if they fail to meet these criteria. Analysis of issues relating to ESG factors is central and not peripheral to the investment approach.

Interestingly the fund manager attending the Investment Committee was based in the United States where attitudes towards ESG have in many cases been more "box ticking" as opposed to the full-on engagement seem by many of their UK and European based competitors. Yet my belief is that once the US gets 'the bit between its teeth', decisive and substantial positive action will follow. A cynic said to me last year that monetisation was key - that's already happened. Consider the actions of BlackRock and Microsoft announced recently. Larry Fink's letter was a considerable statement of intent even if the action to prohibit investment in companies where 25% or more of their revenues come from thermal coal production has a fractional impact on their $7bn+ global investment funds. It is a step rather than a giant leap. Yet I feel certain that it is one of many steps and may well prompt others to follow.

Huw van Steenis, head of UBS's sustainable finance committee, reported back from Davos. He commented that he is now even more firmly convinced that risk analysis on the climate impact of companies and portfolios is 'moving into the mainstream'. No longer will the ESG teams be hidden in the corner within fund management companies; they will be integrated into mainstream analysis. And businesses will be able to respond to client enquiries relating to, for example, the number of companies in which they have invested that have signed up to the requirements of the Task Force on Climate Related Financial Disclosure.

As long term investors become more concerned that climate risks will provide a drag on portfolio performance, they will use their influence positively. This is true of St. James's Place. It is our ambition to be a leader, not a laggard, in this area. We believe that this will improve client outcomes.

I have just started reading There Is No Planet B (https://www.waterstones.com/book/there-is-no-planet-b/mike-berners-lee/9781108439589). It sets out the agenda, the challenges and the possible actions in a clear and simple-to-read manner. The investment industry can play its part in ensuring Planet A survives and prospers. What is the point of an investment with an excellent return if we no longer have a world worth living in.