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OPINION

Emergency on Planet Wealth

Emergency on Planet Wealth
July 4, 2019
Emergency on Planet Wealth

There is perhaps a good reason for that: achieving this worthy-sounding ambition could prove very expensive, perhaps as much as a trillion pounds if the government’s estimate that decarbonisation will cost 1-2 per cent of GDP annually is accurate. France has retreated from its own decarbonisation targets as a result of the gilet jaunes protests – raising the question of who will pick up the tab for the largesse of politicians. 

Indeed, that question remains unanswered in respect of the UK’s new legislation. Although the amendment to the 2008 Climate Change Act was rushed through parliament in just 12 days, the Lords only passed the bill with “regrets” that the government had not said how the target would be met, had allowed little scrutiny of such a substantial policy change, and had excluded international aviation and shipping from the target.

For investors that adds up to yet another source of uncertainty, given that many companies remain very much carbon based – factories need energy and inputs, staff need to get to work, and goods need to be moved around, which means that the journey to net zero remains a long and potentially expensive one for many companies. 

We will soon know just how expensive. Under new plans announced by the Treasury this week, companies, funds and pension schemes will, by 2022, need to document the potential impact of environmental issues on their profits. Shadow chancellor John McDonnell has even suggested that public companies deemed to lack serious environmental strategies should be de-listed – compounding the ongoing political uncertainty created by Brexit and the Conservatives’ struggles. 

The immediate risk is that investors vote with their feet and simply divest from environmentally-compromised businesses. We have already seen the effects of such an attitudinal shift on sin sectors such as tobacco, where ESG selling pressure has seen share prices fall disproportionately faster than the slowdown in trading. Investors will need to be careful not to be left holding assets that no one else wants. 

Of course, decarbonisation will no doubt bring opportunities, too. Asset managers such as Impax and Liontrust (see page 51), both early movers in the ESG sphere, have prospered as demand for sustainable investment has accelerated in recent years. And political support could mean other green innovators replicate that success – although investors will, as ever, need to be wary of bandwagon-jumping small-caps, this time making ESG promises they can’t keep.