It was an interesting week for responsible investment. Stuart Kirk put the cat among the pigeons by suggesting that there were more important issues for investors to consider than climate change.
In an industry conference address, he talked about the ability of our species to adapt to changing circumstances and that, from a financial viewpoint, climate change was an overstated risk. He caught the headlines by asking “who cares if Miami is six metres underwater in 100 years’ time?”.
This was a deliberately provocative speech, designed to challenge some of our approaches to climate change. What was interesting was that Stuart accepted the science – he did not dispute that the world is getting warmer and that this will have implications for the future. What he was disputing was how we were currently dealing with the issues.
Several things struck me about his speech. First, the financial focus – in effect saying that we will be all right on a 30-year view and that there are other, more imminent risks on which to focus. Second, that we will find ways of dealing with climate change, as we have always done. Third, that growth will dwarf the economic impact of climate change in the long run. Crucially, what was missing was an appreciation of the guardianship that current generations have for the planet. This cannot be measured within investors’ timeframes.
I think we need to be more open about choices. As an example, investors’ focus on climate has resulted in less oil-refining capacity. Refining companies are reluctant to undertake big long-term investment projects against a background of shareholder pressure to reduce carbon footprints. This sounds sensible as part of a move away from fossil fuels. What it also does, however, is raise the current price of refined products. It is simple economics: reduced supply equals higher prices. What governments need to make clear is that the transition away from fossil fuels will hurt, and that current generations will need to make sacrifices for those not yet born. This is not an easy sell to those already suffering food and energy poverty.
My other observation is that honest debate – on any subject – should be welcomed. If any idea is strong, it should be able to withstand challenge. I would like more discussion on adaptability to go alongside a continued focus on carbon reduction. There is a growing tendency for polarity – with neither side of a question willing to tolerate dissent. There is an argument that climate change is such an existential issue that challenge on how to deal with it is not acceptable. What this misses is the need to get ‘buy-in’ to the costs involved and the implications of those costs.
Economic news and markets update
Bond markets were a bit quieter last week. 10-year US Treasury yields ended lower at 2.73%, while UK yields were broadly unchanged. On the data front there was a mixed set of global Purchasing Managers’ Indexes (PMIs), with a large fall in the UK reading being the stand-out feature as escalating inflationary pressures and heightened geopolitical uncertainty acted as constraints on consumer demand. Certainly not unique to the UK, but sentiment seems to be worse here. The decline in business expectations reflected concerns about squeezed margins and weaker order books. So not a great picture overall.
In credit markets investment grade debt was broadly unchanged but there was an improvement in high yield markets, with spreads falling around 30bps. Undoubtedly, the macroeconomic background for credit has deteriorated in recent months. Corporate earnings will come under pressure and financing costs are rising. However, current spreads discount this worsening outlook. Looking at investment grade sterling credit I am more positive on the outlook than for some time. This may sound counter-intuitive, but it reflects valuations. Credit spreads discount quite a lot of bad news and investors are getting paid well to take credit over government bond risk. I don’t think it will be a smooth ride, but extending duration in credit looks sensible to me. So, my recent preference for short-dated credit bonds is morphing into taking more duration risk – not at the long end of markets, where all-in yields still look challenging, but just pushing a bit further out along the curve.
Back to my football analogies to finish on. What Real Madrid showed this weekend was that to win you don’t need to be the best team, just to score more goals. You need to take your chances when they come along: PSG, Chelsea, Manchester City and Liverpool take note.
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