Vista - Climate Change – Don’t Get Stranded – Risks and Opportunities

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18/12/2019
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Back in 1935 the FT30 index was established (the FTSE100 didn’t come along until 1984), today only four of the original 30 companies still exist as listed companies. At launch the FT30 had no banks, oils, telecoms or drugs companies. Woolworths and Harrods were there, Austin Motors, Bolsover Colliery, EMI, London Brick and United Steel. The index was concentrated in heavy industrial stocks.

What might the FTSE 100 of the future look like?

Today the companies that make up the FTSE100 are different, oils, drugs, telecoms and banks are there of course, and the orientation is much more towards services, not heavy industry.  The point of looking back is to focus on change. Economies evolve, companies may adapt and thrive, merge, collapse or simply dwindle away as their markets contract and they fail to respond.  This process is happening now, it happens all the time. So what might the make-up of the FTSE100 look like in 2029?  It might seem a long way off but it’s only 10 years.

To have a reasonable guess at the answer we have to consider what the economic drivers of the next decade will be. If you have been watching David Attenborough’s new series Seven Worlds, One Planet you won’t have missed the frequent references to climate change, which today is having a major impact on our world. The series focuses on the natural world, but the impact of climate change affects all of us, and those impacts are set to intensify. In 2015, 197 countries agreed, to commit to limiting global warming to 2 degrees, to avoid catastrophic damage to the world’s climate – this is known as the ‘Paris Agreement’. To achieve this the world economy has to decarbonise; meaning the amount of greenhouse gases emitted, particularly carbon dioxide (CO2), needs to fall sharply. To enable this to happen two things are required; Government legislation/commitment and business involvement.  Governments need to set targets, invest and legislate, and businesses need to be there to provide products and services that make it happen.

Government action

The good news, of which there is precious little these days, is that there already is Government action and legislation globally – more is needed but the direction of travel suggests much more is to come.  And there are now many businesses that through products and services are delivering solutions to help address climate change – and nor is this narrowly focused, because decarbonisation is required across all sectors. Examples of sectors are pollution control, public transportation, water infrastructure, sustainable agriculture, renewable energy, power efficiency and buildings energy efficiency.

The investment industry as a whole has woken up in the past few years to climate change, although it’s worth saying some investment companies have been fully aware for many years.  By and large investment groups can be split by how they consider it - there are two basic approaches. Those who see the risks climate change brings and simply include it in their risk assessment, and those who see the risks, but choose to invest to bring about positive change. Underlying this is the opportunity decarbonising the economy brings, and with it a myriad of other environmental and social challenges that business can help to address and change.

The contribution of fossil fuels

A major contributor to CO2 emissions in the last half century has been fossil fuel companies, some are state owned, some publicly owned. There is a simple fact worth considering; if all the known fossil fuel reserves were extracted and used, it’s predicted that global temperatures would rise by 9.5 degrees (Source: Phys.org (Science X Network)).  If the rise is to be limited to 2 degrees then this implies that those reserves will never be extracted and there will be a major devaluation of fossil fuel companies.  Increasingly investors are divesting from fossil fuel businesses, driven firstly by a wish to reduce CO2 emissions and their impact on the climate, but also in the knowledge that fossil fuels are rapidly becoming yesterday’s fuel, they don’t want to be left holding stranded assets. It’s estimated that investment institutions have already divested $11.54 trillion (Source Fossil Free). 

The opportunity of electric vehicles

But as one industry declines others replace them. A high-profile example is electric vehicles (EV’s). All major manufacturers either have or are planning to launch EV models. For investors the opportunity is not so much the vehicle manufacturers, but the many suppliers of parts, technology and software.  Another visible sector is renewable energy; the International Renewable Energy Agency (IRENA) says that one third of all global power capacity is now renewable energy. It has become first choice when installing new capacity – aside from its environmental credentials it’s easy and quick to install, and in countries like Africa it can be supplied on a small scale without the need for national grids.

Decarbonising the economy

The list of sectors available to those who want to invest for a decarbonising economy has expanded considerably in recent years, and perhaps covers some unexpected areas –  a fund manager we invest with holds a company  that provides ‘global positioning systems’ which enables greater precision when applying fertilisers. This cuts down fertiliser use and increases productivity, and in the process avoids millions of tonnes of CO2 emissions.

The need to tackle climate change is increasingly urgent and will be a major economic driver in the next decade.  By 2029 the composition of the FTSE100 and other indices will have changed, by how much it’s impossible to say, but it seems likely some of the most successful businesses will be in environmental sectors, and perhaps some of the poorest will be in the old industries. As investors we need to look at trends and make decisions on where we think the best opportunities lie, a financial return coupled with having a positive impact is a powerful combination.

The value of an investment with Rowan Dartington may fall as well as rise. You may get back less than the amount invested.

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