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OPINION

Paved with good intentions

Paved with good intentions
October 8, 2019
Paved with good intentions

Labour’s thinking on the economy is once again being framed within an ideological context, rather than the third-way, corporatist model favoured by Blairites. Neither approach does much to unlock potential in the manner of a genuinely free market economy, but the former approach certainly presents a greater threat to equity markets, especially if Mr Corbyn’s ascension to high office was replicated across the Atlantic by Elizabeth Warren, the US senator from Massachusetts and an avowed interventionist, who is now battling for the Democratic Party nomination for next year’s presidential election.

In truth, few people feel any more comfortable with an overtly laissez-faire economic model than they do with a rigid command economy. Yet there were some proposals put forward at the Labour Party conference which could even elicit a degree of support from arch free-marketeers. Mr Corbyn’s pledge to reform the pharmaceutical market provides a case in point.

The proposals would give the state a greater role in research and production, which is probably desirable from a clinical perspective, although how Mr Corbyn feels he will be able to convince drug companies to front-load development capital if he then forces them to produce generic versions of new medicines is anybody’s guess. There is a parallel approach that involves a plan to create a publicly-owned generic drugs manufacturer, along with talk of “voluntary and compulsory licenses”, though one imagines that the latter effectively renders the former redundant, while pharmaceutical companies could relocate or even curtail research & development (R&D) activity if new legislation impinges on their intellectual property rights.

But regardless of how you view Labour Party policy in this area, it’s clear that political risks have intensified as government policymakers and the asset management industry pander to the demands of special interest groups. Many people trying to get in and out of London have poured scorn on the protestors from Extinction Rebellion who have been shackling themselves to Westminster Bridge and other landmarks in the capital. But you need to set that against recent analysis from Pensions Age indicating that 68 per cent of UK savers want their investments to be driven by environmental, social and governance (ESG) considerations. Elizabeth Warren even wants the US military to aim for a carbon-neutral future. Presumably, this wasn’t a major consideration for Dwight D Eisenhower on the beaches of Normandy in June 1944, but it seems that in the age of the social justice warrior green is the new khaki.

There is a public relations element in all this, as it's doubtful that too many asset managers would want to appear out of step with prevailing sentiment, while many of the largest global pension funds have committed to divesting fossil fuel assets. Mandates are being tailored accordingly, so the rush towards ESG principles is gaining momentum. A report published as part of the “Financing the Future” summit in Cape Town states that institutional investors holding assets worth £8.8 trillion have pledged to divest from fossil fuel assets in the period since the Paris climate agreement, although it's difficult to say the degree to which those pledges have translated into action.

But investors should be concerned about the move away from fossil fuels given that 'big oil' accounts for a sizeable chunk of global dividends, although at least a concerted sell-off would have the effect of supporting yields. Regardless of the commitments you’re still left wondering if a lot of this is simply lip service. So, while Norway's $1.1 trillion sovereign fund plans to divest in companies solely dedicated to oil and gas exploration and production, the country has also just commenced production at the 2.7 billion barrel Johan Sverdrup North Sea oil field, which is expected to produce 660,000 barrels per day at a breakeven level of $20 a barrel – go figure.