I wish to challenge the long held view by a large part of the investment community

Myth 1- The days where investment and asset managers can see environmental analysis as an optional risk are long gone

Myth 2 – Investing in environmentally friendly funds is no longer just a nice to have that could sacrifice some investment performance.

There is now more and more evidence supporting the view that ignoring environmental risk is creating financial risk. Nowhere is this more evident than in the area of Carbon Risk.

The environmental damage caused by the continuation of carbon emissions at their current rate has been a political message that we have become very used to over the last number of years. It has taken sometime however for this to permeate into the narrative of the financial industry. We are, at last, however starting to see leading financial spokesmen rise to the challenge.

In September 2015 Mark Carney, Governor of the bank of England sent one of the strongest messages yet as to the financial impact of climate change. Commenting on weather-related events that can be linked to climate change he stated that ‘since the 1980’s the number of registered weather-related events has tripled and inflation-adjusted insurance losses from these events have increased from an annual average of around $10bn in the 1980’s to around $50bn over the past decade.

The commercial implications of this are significant. Most importantly there is a growing consensus that as much as 80% of proved fossil fuels will have to be left in the ground to avoid catastrophic climate change.

We are also now starting to hear more and more of the term ‘stranded assets’, that is those assets held by companies in fossil fuel-related industries that are, in effect, a wasted asset. So how is this playing through in the investment markets?

There are some interesting indicators already coming through. For example MSCI, one of the world’s best known index providers, have developed their ‘Ex- Fossil Fuels Index’ excluding companies that own oil, gas and coal reserves. Since its launch in November 2010 to the end of October 2015 its average annualised performance was 10.27% compared with 9.07 for the standard index. It’s also outperformed the main index in all of the last 3 years.

It is fair to say that other shorter term factors are impacting performance, such as reduced demand from China and low oil price, but longer term trends are definitely coming through.

At a recent seminar I attended Henderson Global Investors, a leading environmental asset manager, highlighted the fortunes of two companies at different ends of the carbon spectrum. Peabody Energy is the largest private sector coal company in the world. Over the last 5 years its share price has fallen from over $800 a share to just over $13. By comparison Tesla ,the electric car company, who are investing massively in solar to reduce the coast of batteries, have seen their share price rise over the same period from $30 to over $200 a share.

Investment houses, like Henderson, therefore recognise ‘stranded assets’ as something they must be tuned into. As a result it could be strongly argued that those asset managers that really understand this will still a lead over those that don’t.

Oxford University’s Smith School of Enterprise and the Environment have a programme dedicated to the systematic analysis of the subject. Ben Caldecott, director of the programme, comments ‘there are some real leaders, but there are lots of investment managers who do not really know what they are doing. There is lots of research showing this stuff is financially material (but they have not yet integrated it into investment processes’.

As an investor the message should be contact an adviser, like myself, who understands this risk and can point you towards funds which will avoid it!.

Please subscribe for future newsletter

The Non SRI  Market starts to take note with regard tobacco stocks.

Over recent months I have seen a number articles from SRI fund managers querying the financial future of tobacco stocks indicating ,perhaps , the start of the real decline in these unwanted commercial giants.

However I still sense there is a whiff of scepticism amongst the wider investing public that somehow whatever is thrown at the industry it will survive as a good old defensive stock that will always hold up when economies get sticky.

Perhaps however the tide is finally turning. Below is an article from Stephen Bailey , analyst with the fund group Liontrust. Liontrust have no bias towards SRI, and as far as I know have never been mentioned as being remotely interested in this area.

Yet the article clearly explains why holdings in British American Tobacco and Imperial Tobacco were sold in November 2012. Simply put hard qualitative analysis showed that political, social and economic factors are now major challenges for these organisations. In particular these are challenges are being set in the very emerging markets where these organisations have set out their stall. There is also a recognition that the market has not fully valued in these potential long term problems.

These kind of articles are great endorsements for the SRI industry and show that many SRI analysts have been ahead of the curve on this.

Source: www.liontrust.co.uk

In addition to the Euro-scepticism that has resulted from the recent elections I am also detecting a strong hint of complacency with regards to Decarbonisation , and ultimately sustainability of our planet.

In a recent Guardian article (see below) it appears that Energy UK, the trade association representing many of the big energy companies, have been lobbying hard to relax decarbonisation and renewable targets. Specifically the head of the group, Angela Knight, says it is time to move away from “an emotion driven and expensive [energy] agenda”.

This in itself is an interesting statement. Certainly cost issues are still a challenge to the successful growth in decarbonisation. The article refers to an Ernst and Young survey that says attractiveness of renewables to investors and developers in the Uk has tailed off over the last 18 months. Whilst, to some extent, this is true the report seems to confirm that much of this loss of faith has resulted from the uncertainty of the market. For example it points out that infrastructure support for renewables has been affected by the uncertainty surrounding the ‘Contracts for Difference’ pricing introduced under the Energy Market Reform.

However it tempers this by stating that technology costs are still coming down and providing plenty of incentives. It also states that other parts of the world are building frameworks that are much more supportive of low carbon energy production.

Therefore I am concerned that certain language is pointing to a dangerous ease off, playing on the populist agenda. In other words it’s a quick win to ease off on our de-carbonisation targets and announce an immediate cost reduction in energy. As we have seen above however cost does not have to be a long term problem.

I am also intrigued by Angela’s reference to an emotion driven agenda. Agreed, we should not be running around like headless chickens predicting the end of the world is nigh !. At the same time however the environmental facts that are out there should lead us to be emotional to some extent. Emotional enough to say that the one cost never too great to bear is the survival of a safer, sustainable, planet.

Source: www.theguardian.com