Just in case you missed it, the meeting of world leaders at COP26 in Glasgow – not to mention the rash of governmental announcements that are accompanying it – points to one massive, inescapable truth: namely that somewhere between the signing of the Paris climate agreement in 2015 and now, the world as we know it changed forever.
It hadn’t quite changed when Extinction Rebellion began planting brightly painted sailing yachts in various public roads two years ago. I don’t think it had even quite entered the collective consciousness in 2019 when the British government committed the UK to being the first major nation to become carbon net zero in 2050.
But it has now.
When on the one hand you have protestors marching along motorways demanding that we have more insulation in British homes – hardly a rabble-rousing call to arms – and on the other we have the future king handing out millions in his Earthshot Prize designed to catalyse innovations to save the planet from environmental disaster, you know that the minority view has become the mainstream.
And the presence of world leaders from 120 countries in Glasgow crystallises that fact. Ahead of 2050, Britain promised to cut greenhouse gas emissions by 78 per cent on 1990 levels by 2035. Meanwhile ministers have also committed to ban fossil fuel only cars in 2030 and to decarbonise the power sector by 2035. ‘If we don’t get serious about the threat of climate change today, it will be too late for our children to do so tomorrow,’ Boris Johnson said in his opening remarks at COP26.
That Britain is at the front of the pack in terms of commitments is all very good, the wider point is that the direction for the rest of the world is clear, too: we are now rushing headlong towards a decarbonised economy, and there are vast sums of money to be made from this enormous period of change and innovation, epitomised by the gravity defying trillion-dollar valuation of Tesla.
While it’s unknowable, my guess is that by the time we’ve weaned the planet off burning carbon there will be at least a hundred or more Teslas out there, born or hailed by stock markets.
Just take a look at the numbers: the Global Commission on the Economy and Climate, an international body made up of former leaders and finance ministers, estimates that determined action to decarbonise our economies could deliver $26 trillion-worth of growth by 2030. And if you consider that the cost of decarbonising the US power grid alone is estimated at $4.5 trillion, then you might think that number rather conservative. Mark Carney, former Bank of England Governor, is now chairing the Glasgow Financial Alliance for Net Zero (GFANZ), a group of some 300 financial companies with around $90 trillion in assets, which ‘recognises the critical role financial services firms must play to support the transition to a green economy’. It notes that the annual investment in clean energy needs to ‘more than triple by 2030 to around $4 trillion’ to support this.
Whichever way you look at it – whether you think the future is green hydrogen, nuclear, solar, wind or a mixture of all – this is arguably going to be the biggest economic transformation since early man put fire to use. It’s huge, it’s happening, and it will have correspondingly massive ramifications for investors.
For speed, don’t forget that it only took 15 years for the horse to be displaced by the car. As we all know the clock has already begun ticking on petrol and diesel cars, and it’s begun for national power grids too.
Which means that as well as the opportunities, we must also consider the potential risks to investors. There will be winners and losers. Consider the so-called ‘stranded assets’ – the coal and oil sitting on the balance sheets of many highly valued blue chip companies that may not in fact now be assets that they will ever be able to realise? The energy companies may be undervalued now, but you wouldn’t want them in your portfolio when the tide goes out.
But look again and you’ll see that the likes of BP and Shell insist that they are at the vanguard of the change in the energy systems that the world needs to see. We also need their products if we are to keep the lights on for the next decade or more. Investors who want them to walk away from carbon sooner might be advised to look at what happened when mining giant Anglo-American hived off its collieries into a separate company, in order to appease London fund managers. The new company, Thungela, immediately pledged to extend the life of those coal mines, defeating the ultimate purpose of the shareholder pressure. It’s a case of being careful for what you wish for.
Which brings us to the choice facing all of us as global citizens and investors: when it comes to our wealth, it doesn’t just make sense for us to ensure it’s aligned with what’s going to go up financially, but we also want it aligned to our moral outlook. It’s not wrong to want your investments to be on the right side of history. Otherwise, one way or another, someone will be pulling down your statue in years to come.
So how do ordinary investors achieve this, without exposing their savings to undue risk? Funds aligned with ESG – that is good environmental, social and governance principles – are out there, and most provide a negative screen from the ‘bad’ investment opportunities. However, negative screening alone isn’t necessarily going to cut it in the age of once-in-a-millennium opportunity. In addition, a negative screen may also block out ‘dirty’ incumbents that may be part of the answer, too, thereby starving them of the capital they need for investment and positive change.
Instead of focusing on negative screens, I would argue that we need to move portfolios to ones that are intrinsically ‘planet positive’. That’s what we are doing at Oakham, taking ESG to the next level by embracing four investment themes that are aligned to the demands of the planet and its climate: clean energy and renewables, sustainable agriculture, water and waste management, and healthy living and nutrition. Alongside this sits a commitment to promote biodiversity through the portfolio.
In the long run, when we confront the possibility of a planet with 10 or 11 billion people on it in 2050, we will have to tackle more fundamental questions over managing the earth’s finite resources in a sustainable and an equitable fashion. As a result by then we may have deviated from our longstanding adherence to a GDP driven economic model, perhaps adopting a circular model instead, one in which we add up economic success differently.
Working that out is probably the task of the next 20 to 30 years. For now there’s a planet to save from climate change. There’s also ‘planet positive’ growth to be enjoyed by investors, growth which balances the risks with the returns.