Blain’s Morning Porridge – January 15h 2020
“It is never too late to jump off the train and head down a different track… ”
Lots of stuff yesterday from the Democrats clawing the eyes out of each other, Oxford University reopening its Century Bond, and the new Tory government bailing out regional airline Flybe – which, despite lots of noise, is sensible. Today, the big event is signing of the “beautiful monster” US-China trade deal – which is a plus in terms of de-escalation, but it’s still putting lipstick on a pig. The market looks resolutely bullish, which is probably the best reason to be cautious.
Sustainability
Sustainability looks likely to become the buzz word of 2020. Blackrock CEO Larry Fink grasped the nettle earlier this week when he told his troops “sustainability is at the centre of our approach”. He added: “Climate Change has become a defining factor in Companies Long-Term prospects”, and its likely to fundamentally reshape finance.
I reckon Sustainability-Awareness is going to prove the first great trade of the 2020s. I’ll describe the downright bleeding obvious trade below. It’s fiendishly simple.
Following the BlackRock comments, Mark Gilbert of Bloomberg wrote an excellent response: “Blackrock’s Climate Activism Has a Passive Problem”. He focused on the money Blackrock runs in passive funds which are basically not available for addressing the complex issues raised by sustainability – index mimicking EFT’s can’t ditch firms on green whims. Gilbert also reports on how the big funds make claims to do climate good, but consistently vote against climate-related initiatives.
You can understand why BlackRock wants to be sustainable. I’ve read 56% of millennial investors aged up to 34 want “sustainable investments” – so it’s clearly a market opportunity to address!
Recently I’ve come across many investors who claim to be sustainability focused, who simply won’t consider investments that might raise ESG issues. They need a shake. They need to understand Sustainability is much more complex than hiding behind ESG barricades! Some funds get it.
But what is Sustainability?
My own view on Sustainability was founded back in 1983. Then I was studying Environmental Economics as a course in my Economics degree at Heriot Watt University back – it was the first year the course was run. I came across Lovelock’s Gaia hypothesis which seemed a bit hippy-dippy, before discovering Kenneth Boulding’s Spaceship Earth thesis. (Buckmaster-Fuller was writing along the same tech lines.) Boulding recognised Earth has limited resources and reserves, which includes our capacity to pollute it. Actions have consequences. Consequences have costs – as we are discovering to our horror today. Its readily understandable economics.
Yet, whenever I ask the question “what is sustainable investment” to investors, I get a range of responses… many of which are not particularly convincing. Does dumping every investment that creates CO2 emissions result in sustainability? (If so, you are going to be somewhat limited in your investment choices.) Does launching new EFT’s that “screen” fossil fuels mean the firm is going to ignore fossil fuels entirely – create sustainability?
Sustainability is a complex concept which can’t be answered with simple slogans like “Flygskam”, “Stop all Fossil Fuel Extraction” or “dump the Oil Majors”. Investment firms taking such approaches are ticking populist boxes trying to flog product.
I’ve read articles suggesting sustainable investing means:
- Excluding industries and companies that don’t reflect sound environmental, social and governance (ESG) values
- Factoring environmental factors into portfolios to pursue returns and risk
- Investing to create positive environmental and social impacts
- Using markets to solve social and environment issues through applied capitalism
Such approaches read like frameworks. Meanwhile, I read a number of banks intend to be carbon neutral by the end of this year, while others are pledging investments to “transition to a low-carbon, sustainable economy in x number of years”. Another bank proclaims they are well placed to finance transition because only they have the “high-level” insights and relationships to create “blended” finance from government and private sources – achieving the right mix of policy objectives and market returns to finance a sustainable future.
Meanwhile, there are the UN’s 17 Sustainable Development Goals including eradicating poverty, advancing environmental sustainability, while providing decent housing, clean water and health to everyone. These sustainable development goals are laudable, achievable, but they will be costly. But they won’t be achieved if we take the view sustainability can only be achieved by cutting off all carbon growth. That way leads to madness.
To understand where the world goes from here in terms of Sustainable Investment, you need to understand the reality – that to address Sustainable Development Goals and Clean the Planet, we can’t abandon growth and we can’t decarbonise overnight. If we did it would just be more people fighting for relatively fewer resources. If we focus purely on the energy aspects – while not forgetting food, water, health, education and the rest:
· The carbon problem is being addressed; through cleaner, efficient and economic energy sources, carbon capture and offset markets, but these require long term vision.
- Despite the spectacular rise of renewable energy and price falls, problems with capacitance, energy infrastructure and simple space, means our reliance on fossil fuels is not going away anytime soon.
- Global demand for energy continues to soar – especially from rising populations in Asia and Africa – faster than renewables can be are introduced.
- Global growth to feed, clothe, house and create employment requires energy.
- New technologies are being innovated, existing renewable solutions may be overturned by new approaches and invention.
Let me do a quick mind dump: although renewable energies are becoming more efficient, they are not the whole solution. Electrification is very efficient, but issues such as capacitance and current grid systems limit the application of renewables. Hydrogen may be a more efficient battery. We will still need fossil fuels if the global economy is not to suffer a dystopian crisis of low growth. Coal remains the most cost-efficient fossil fuel, although its increasingly likely to be used in more carbon friendly ways – though coal gas tech. It is a necessary evil. Natural Gas is a much cleaner resource than coal.
Experts predict the whole planet could be decarbonised globe by 2100 by improving sequestration and offset, renewables, new technology, great efficiency while still getting significant amounts of energy from fossil fuels.
That sounds like sustainability to me.
Which leads me to the big trade: The moment to buy is when everyone else is a seller. The oil majors aren’t on everyone’s wish lists anymore, but they trade on P/Es close to single digits. When the market wakes up to the reality of long-term fossil fuel, and the likelihood smart oil majors morph into smart green energy firms by financing innovation – as they are doing – then they look a snip.
What is my definition of Sustainable Investment? How about: Addressing global growth, ESG objectives and development goals, over the long-term through carefully weighed tech and business investments most likely to achieve a sustainable long-term global growth economy that is fair and equitable for all.
How does that sound? We are nowhere near it today..
To give you an example I’ve used before. If you want to build renewable power windmills and solar farms you need steel. You can’t make steel without Coal.
5 Things to Read Today
Bloomberg – Climate Change is Killing Alpine Skiing as We Know It
Bloomberg – JP Morgan Just Posted the Best Year for Any US Bank in History
WSJ – The Fed (Mostly) Didn’t Cause the Latest Stock Market Melt-Up
FT – Carefree investors should heed lessons from 2018 shake-out
FT – US Tech backlash forces China to be more self-sufficient
Out of time, and trying to do the day job!
Bill Blain, Shard Capital