Responsible Capitalism

Posted by Liz Rees in Latest insights category on 31 Jan 20


Last week, two events illustrated the extent to which Environmental, Social and Governance (ESG) factors are taking centre stage. The first was the World Economic Forum (WEF) in Switzerland, which adopted the theme ‘Stakeholders for a Cohesive and Sustainable World’. The second was the annual letter to Chief Executives from Larry Fink, Chairman of BlackRock, in which he highlighted climate change as “the defining factor in companies’ long-term prospects”.

Heated debate at Davos: Trump versus Greta

World political and business leaders gathered for the 50th convention of the WEF in the Alpine town of Davos. Activist Greta Thunberg spoke of the need for action to avoid the threat of climate catastrophe whilst Donald Trump took a very different view.

Ms Thunberg demanded that all institutions “immediately halt all investments in fossil fuel exploration and extraction, end all fossil fuel subsidies and completely divest from fossil fuels”.

Trump was somewhat a lone voice with his dismissal of the evidence for global warming and advocating a focus on restoring economic growth. Amidst rumours he had had a plane of Californian wine flown in, he reminded the audience that the US remains the engine of global growth.

Conviction is clear

Despite these divergent views, it is clear that the environment has moved firmly up the political and policy agenda with many attendees using the event as an opportunity to lay out their plans for action.

The WEF’s assessment of global risks for 2020 found the top five are all environment related: extreme weather, climate action failure, natural disaster, biodiversity loss and man-made environmental disasters.

Although it will cost trillions of dollars to achieve the aims of the United Nations’ Sustainable Development Goals, if investment is directed to the right areas it may have a positive effect on global growth over the next 10 years. For example, as alternative energy becomes increasingly cost-competitive relative to traditional sources, those who built the infrastructure, expertise and barriers to entry are starting to reap the rewards.

Bank of England Governor Mark Carney backed the scientific evidence that the world is rapidly running out of time if it is to meet targets for limiting global temperature increases whilst acknowledging that some key initiatives are coming from the US financial sector and tech companies.

Technology leader Microsoft does not believe governments are doing enough and has committed to become carbon negative by 2030, meaning it will remove more carbon from the environment than it emits. Fellow software giant Salesforce announced that 300 companies have joined its project to plant a trillion trees by the end of this decade.

Some large asset managers have formed the Net Zero Asset Owner Alliance which encourages companies to become carbon neutral by 2050. The 18 members have $4.3 trillion of assets under management.

BlackRock takes a stance on fossil fuels

As the world’s biggest asset manager, BlackRock has considerable influence when engaging with companies and through its shareholder voting rights. Larry Fink devoted his latest missive to explaining the steps BlackRock is taking to address climate change.

He noted the significant and lasting impact that many believe it will have on economic growth, and how markets have been slower to reflect the risks. However, he sees awareness rapidly changing and believes “we are on the edge of a fundamental reshaping of finance”.

Fink warned that Blackrock will take a ‘harsh view’ of companies that fail to provide data on risks relating to climate change. He expects all companies to report in line with the voluntary guidelines of the Sustainability Accounting Standards Board and adhere to the Task Force on Climate-related Disclosures, a voluntary framework headed by Mark Carney.

BlackRock will vote against companies that are not making adequate progress on sustainability disclosures. He also promised that Blackrock would divest from any company that generates more than 25% revenues from thermal coal and will launch more ETFs that invest sustainably.

Fink concluded: “the money we manage is not our own. It belongs to people in dozens of countries trying to finance long-term goals like retirement and we have a deep responsibility to promote long-term value”.

Where should I put my money?

Climate change would not have featured at Davos a decade ago and the fact that it is now at the heart of such events has significant implications for investors.

That is not to say we should only invest in specialist funds but does mean it may be worthwhile investigating whether a fund manager incorporates ESG risks in their investment process. Morningstar globe sustainability ratings give an indication of how well a fund’s investments are managing these risks.

There has been an abundance of fund launches with a ‘positive impact’ approach although most do not yet have long-enough track records to earn Morningstar ratings. Funds with longer histories include Jupiter Ecology and bronze-rated Impax Environmental Markets.

Important Information: We do not give investment advice so you will need to decide if an investment is suitable for you. If you are unsure whether to invest, you should contact a financial adviser.