The Cop 26 conference in Glasgow appeared from a distance like a discordant circus act. There is little that infuriates the young quite as much as aged politicians promising to do a bit more but openly acknowledging it will be nowhere near enough. It is a little like a fireman standing in front of a burning building boasting that today he has hosed 1000 litres of water at the fire: ‘tomorrow it will be 2000 litres.’ When the homeowner asks whether this will be enough to put out the fire he says ‘of course not’ but asks for credit for doubling his efforts.
For the young, a genuine sense of panic is spreading about the effects of climate change – which is just not present in older leaders however apocalyptic the speeches at UN conferences are - and no amount of self-aggrandizing half-measures will calm it.
For investors though, the changes at Cop 26 are significant. It shows that the developed world will do all it can to discourage investment in old carbon-guzzling firms and favour anything with a sustainable tilt. The former Bank of England governor Mark Carney has over the past year secured agreement that $1 trillion of assets managed by fund management companies will move onto a sustainable footing in the coming years. This pledge includes many of the companies in which we invest.
This poses an important question around whether investing in sustainable companies will reward investors to a greater extent than would normally be expected. Will so much money be funneled to sustainable companies that it becomes a one way bet for shareholders? In one sense the answer must be yes. There is a massive support holding up companies that are part of the answer to climate change and this supports investments over the next twenty years.
Indeed, Larry Fink, the chief executive of the world’s largest fund manager Blackrock called it ‘the largest arbitrage of my lifetime.’ He believes the world’s governments have his back if he buys sustainable companies.Yet there is an important catch. For every sustainable winner there will be many losers. Almost by definition these companies are developing new technology. Not all new technology works. When disruptive companies are successful, they become the best investments on earth. But disruption comes with risk and much failure.
It also does not follow that because sustainable companies will be winners over the next twenty years they will necessarily be winners over the next one, two or three years. In the short to medium-term outperformance may well be found in the more old-fashioned art of gradually rotating a portfolio in response to the interest rate and inflation environment.
We will work hard to ensure our portfolios can own those companies that are really making a difference on climate change. Both because it’s right and because it is a fantastic investment opportunity. But we should be cautious about believing the hype. The important task is carefully picking through the opportunities to separate the winners from the losers.