Episode 26: A New Hope

With apologies to aficionados of the original Star Wars film for appropriating and re-working its title, it seemed a suitable way to frame this quarter’s piece and give an overview of November’s COP26 UN Climate Change Conference in Glasgow. It’s an apposite theme too, given a huge amount of hope is still required if the more catastrophic threats from climate change are to be averted, simply because the firm commitments and policies aren’t there yet. The implications of the latter may seem to jar with an opening talking of hope, however there are positive signs which we’ll attempt to unpick.

First, COP26 has not given us definitive policies and commitments that will keep the climate to no more than 1.5 C of warming. Given that that level of warming already implies substantial loss of land and life, on the face of it our existential climate emergency isn’t yet existential enough to trigger the actions needed to combat it. Inevitably, some have described COP26 as a failure as a result and it’s easy and understandable to see why. To your author though, admitting it as a failure seems the equivalent of throwing the towel in on the challenge and if we were collectively to do that, what then? Where will the impetus for change come from if we extinguish the ambition and hope to seek a better future? Down that road lies a society where those in safer locations and/or with greater wealth to buy their way out of trouble will be more insulated, while those people living on islands certain to be swamped by rising sea levels, or already contending with severe drought in remote African deserts, are abandoned to their fate. That’s a world I believe we – all of us at Castlefield and all our clients – are striving to avoid.

Accepting that the conference didn’t solve the problem, what did it achieve? It’s certainly not been written off as a failure of the nature of Copenhagen in 2009, even though not hailed as a success as Paris was for COP21 in 2015. Progress was made on coal, deforestation and methane, each of which needs to be reduced dramatically, while signs of the business and finance industries acknowledging their part to play was evident. This latter point is critical as neither public nor private finance alone can tackle climate change; they need to work in tandem. The material pledge on cutting methane is noteworthy too, as it shows the understanding that it’s not just a case of focusing on oil, or coal, but rather the whole fossil fuels complex. While the last-minute watering down on coal to say “phasing down” rather than “phasing out” was highly disappointing, I’d argue that something was better than nothing. Whether we like it or not, such political agreements inevitably involve compromise, and some gain is better than no gain at all.

Perhaps it’s the case that COP26’s ambitions were too modest. Perhaps the belief in achieving the outcome the planet needs was lacking. Perhaps eyes were focused on damage limitation, rather than damage mitigation or even restoration. Overall, the Conference perhaps earns the label of a ‘qualified success’ (at best). That said, any gains will be largely ephemeral unless all stakeholders continue to push for more; for governments, that means strengthening their nationally determined contributions (NDCs) and for developed nations, stepping up to actually deliver the hundreds of billions of dollars that developing nations need to tackle climate change. One is tempted to say that the pace of change remains glacially slow; however, perhaps that’s an adage in need of an update given how evident it is just how fast glacial melt is occurring and triggering dramatic ecosystem impacts.

For investors such as ourselves, our contribution means holding companies to account and pressing them on their plans, while using our voting power where they fall short. We’re already well underway here and our engagement on climate change is only going to grow in nature and volume, while we’ve also agreed when we aim for both our business, and the investments we manage to reach Net Zero. Finally, although we would unquestionably prefer to be celebrating a momentous, world-changing COP26 outcome, we are where we are, and hope must spring eternal. There’s no alternative.

As an aside, for an interesting transcript assessing the event, I recommend this one of the Rachman Review podcast:

https://www.ft.com/content/f1dbd73c-381c-475b-8b22-fa07abd6d92f

Moving beyond COP26, issues of energy seem poised to dominate in the short-term. Without going into a detailed dissection of the UK’s energy market, the flaws in the system have come home to roost. Many smaller challenger firms have collapsed and in the absence of any political or regulatory intervention, UK domestic fuel bills could see the price cap increase by up to 50% in April as it stands. It goes without saying that such a jump in the cost of energy will have a materially adverse impact on consumer finances and particularly on the poorer in society. We’ve previously written in these pages about the regressive nature of the pandemic and the impact of the Universal Credit uplift being reversed, and this threatens another unwelcome squeeze. The reality is that the potential increase is simply too large to go through unchallenged, even if we can’t yet say who or what shape any intervention will be led by and take.

However, one of the dangers is that a fringe group of the government is pushing for environmental levies to be scaled back as part of a package of measures to soften the blow; with climate change denial no longer given any credence, opponents of tackling it are now adopting such new tactics to try and stymie the steps needed to do so. As we’ve already shown, the world isn’t yet doing anywhere near enough to get to the 1.5 target, let alone with trying to hamper even those insufficient measures. It might be better to tackle the huge subsidies that continue to be given to the fossil fuel industries each year, for one, especially now that the IEA (International Energy Agency) has warned that beyond those projects already committed, no new oil and gas fields, or coal mines, are compatible with reaching Net Zero. Providing such subsidies seems literally the definition of throwing good money after bad. The refusal by successive UK governments and Chancellors to increase fuel excise duty in line with inflation for twelve successive years is another short-sighted policy and one that’s contributed to higher emissions and foregone tax revenue over that time. Worse still, it postpones the behavioural change required of consumers to adapt to the higher cost by reducing their demand.

So, we sit here now, entering 2022 and a third year of pandemic-affected life, with a worsening energy crisis and contrarian government policies at a time when renewable energy sources are increasingly out-competing fossil fuels on cost in a growing number of markets. It’s perhaps not the cheeriest of pictures to paint. However, we ought not to lose sight of all the reasons to be optimistic and positive.

We know that renewable energy technology is going to continue to get cheaper and see more and more capacity added around the world; we know that private finance and the investment world are increasingly throwing their weight behind the drive to make Net Zero more than just a pipe dream. We know that there are many positives beyond an environmental focus too: the progress made in improving gender diversity in UK boardrooms is evolving at pace into a broader development encompassing ethnic diversity too, while the data available to investment managers like us is becoming more readily available to be able to apply further pressure for change here too. The issue of biodiversity is growing in prominence too; I confess to having seen this previously within the prism of climate change, rather than as an issue in its own right as must be the case. Different industries and different locations are searching for answers to these issues and more; the key is in understanding that often, they are two sides of the same coin. The more investors can grasp that and act accordingly, the greater the impetus behind finding sustainability in any and all forms will be, and the greater the chance of success. 

Written by Simon Holman (this article originally featured in the investment management report Q4 2021).