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03 March 2022

Peeling the Shell Off the Nest Egg

If last year’s COP26 summit showed us anything, it was that international agreements are an almost impossible challenge when they involve a collection of nations with disparate agendas. Our subject of the Winter 2022 issue of Market Insight, India, joined forces with its eastern neighbour China at the eleventh hour to revise the COP26 target to phase out coal entirely in favour of phasing it down. It was a blow to the conference agenda and the COP’s President, Alok Sharma, made little attempt to hide his disappointment during his closing speech.

Climate activists were understandably furious, too, with two of the largest Co2 emitters – making up around a third of the total global emissions flaking on their commitment to combat the global crisis. Even so, it feels rather arrogant to expect a nation like India to advance its economic development without the same means in which its Western counterparts did for much of the 20th century.

Without coal, India’s population of around 1.4bn would be without electricity and replacing this with renewable energy sources is a gargantuan undertaking. So, it is clearer than ever that geo-politics are not to be relied upon in the climate agenda. The UN Intergovernmental Panel on Climate Change estimates that around US$1.6-US$3.8tn is required annually to avoid warming exceeding 1.5°C (India’s entire GDP sits somewhere in the middle of this figure) and governments just don’t have the firepower to address such spending. Instead, the future of the planet must have a helping hand from private investment.

Indeed, ESG (Environmental, Social & Governance) investments have a become a hot topic over the last few years, with a strong demand for cleaner energy sources and a promising outlook for financial returns. On the contrary, ‘dirtier’ sources of energy have become taboo investments, banished to the sin bin with the likes of tobacco. It is little surprise to see the UK state-backed pension fund ditching the US Oil giant Exxon Mobil from its investment portfolio late last year. The fund cited its criticism of the company’s progress in managing climate change risks. Is it not, however, a little unrealistic to suggest an oil company can ‘manage climate change’ when its primary source of revenue is directly linked to fossil fuel production? Well, in fact, yes. UK oil companies Shell and BP are trailblazing a new initiative to become net-zero carbon emitting entities by 2050, with action already afoot to transition their operations into renewable energy sources.

Of course, to do this, it requires deep pockets of investment from shareholders and with many ESG mandates now simply screening out ‘dirty’ companies, it seems they are stuck between a rock and a hard place. Perhaps institutional investors with the largest of pockets (like Nest) should begin to use their capital to engage with these companies rather than divest entirely.

Ultimately, the latter approach won’t change these companies, merely leave them with the existing operations they have; forever destined to run down our planet’s resources until they are gone. ‘Invest and engage’ is not revolutionary but does add additional challenges for fund managers and requires extra due diligence. For a more conscious client with the motivation to invest for good, it might be worth considering looking beyond the obvious green labelled funds to see who is trying to make a difference. Investment capital can be a very influential tool and companies are under a degree of obligation to appease their largest shareholders.

This article was taken from the Winter 2022 issue of 1875. To subscribe to our investment publications, please visit www.redmayne.co.uk/publications.

Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned. The value of investments and any income derived from them may go down as well as up and you could get back less than you invested.
Peeling the Shell Off the Nest Egg
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