The world is no longer just under starter’s orders but has now set off at a blistering pace, but one that may not yet be hot enough to control climate change and the consequential increasingly frequent natural disasters. Nonetheless, we have entered a time of great change that will catalyse both threats and opportunities.
While it may not be apparent to the public at large, ‘behind the scenes’ there is a quiet but forceful revolution rapidly gathering momentum. It is not so much that 195 governments in total have now signed up in support of the Intergovernmental Panel on Climate Change’s (IPCC) recent report asserting that climate change is without doubt man made, but rather that increasingly the business world is doing so of its own accord.
It has always been easy for governments to make empty promises. It is not that the promises were cynically made – very often they were passionately ideological but expressing a political ambition and getting legislation passed in a democratic institution are two very different things.
While I certainly would not want to live under any system of government other than democracy, it is perhaps why greater confidence should be put in the Chinese declaring that they will set 2060 as their timeline for a zero-carbon economy – they do not have to win any votes to deliver that and generally do what they say they are going to do. For me, what is very much more exciting is that Environmental, Social and Governance (ESG) issues have been forcefully pushed to the top of the corporate agenda. The days when investment institutions’ only interest was profit forecasts are fast going. That is not to say they are not interested in profit forecasts, but they are not only interested in profit forecasts. Sitting alongside that is their interest in a business’s ESG credentials.
Public companies (those listed on a recognised stock exchange such as the London Stock Exchange) are highly dependent on the support of institutional shareholders – no matter how successful a company may or may not be, if there is no demand for their shares, the share price will fall. To ensure a company’s board is focused on shareholder returns, much of their remuneration package is predicated on share price performance.
It used to be the case, with very few exceptions, that the principal question an investing institution would have for a company reporting its results was ‘what is your profit forecast’? While that is still a key concern, sitting alongside that is a similar concern about the company’s ESG credentials. It might be a little naïve to think that investing institutions have all adopted the moral high ground with their sole aim being to save the planet at any cost. More likely, institutional investors are seeing strong and growing demand from the retail investors who invest in their funds for sustainable investment. In short, if they are to raise money from the investing public, increasingly they need to demonstrate that their focus is on sustainable investment.
When investment managers select a company to invest in (by buying their shares), they are looking for the holy grail of a strong, experienced management team and a sustainable business model that can deliver profitable growth, and even better when that is cash generative. Increasingly, it is businesses that are focused on sustainability that are evidencing these traits. For example, it is intuitively obvious that the green energy sector, including its supply chains, will see strong growth for many years to come, so identifying businesses best placed to take advantage of that offers the potential for strong investment returns while reducing the carbon footprint.
Political leadership remains critical in support of this global endeavour. This is clearly manifested in the change of the US president from Donald Trump to Joe Biden; but conversely, there remains very real concern about China’s commitment and intent with its ever increasingly autocratic leadership led by Xi Jinping. Notably, China is one of a very small number of countries that have not signed up to the IPCC report. Nonetheless, they have publicly committed to achieving zero carbon emissions by 2060 and do not have to worry about the niceties of passing legislation as is the case in Parliament to do so. I suspect China’s game will be to embrace climate change by dominating as much as possible the resources and industry needed to make it happen.
For the record, China has the highest level of CO2 emissions at circa 11.5 gigatons (2019) followed by the US with circa 5.24 gigatons.1 However, when measured per capita, China is ranked only 51st at 7.1 metric tonnes per capita compared to the US (ranked 13th) at 16.06 metric tonnes per capita.2 China’s population is more than four times larger than the US and since a large proportion of China’s population is still living a third world existence, China has the opportunity to bypass the traditional carbon-based economy in fast tracking those populations into a greener circular economy. In short, China may turn out to be the dark horse in the Race to Zero but needs to be if the world is to be saved from the worst of climate change.
[1] https://worldpopulationreview.com/country-rankings/co2-emissions-by-country
