Climate change is the hot topic
FOLLOW the money. The catchphrase was made famous in All The President’s Men, the film about the Watergate scandal. This week, if you literally want to do so, you go to Davos.
According to Bloomberg, at least 119 billionaires are heading there to the World Economic Forum’s annual conference. What will be their prime concern? Not the US/China trade war, not the travails of the German car industry, not Brexit, but how to invest in an environmentally constructive way.
The marker was put down last week by Larry Fink, boss of BlackRock, the world’s largest money manager. His annual letter to chief executives argued that climate change was leading to ‘a fundamental reshaping of finance’.
He warned of the potential impact on many aspects of finance, including mortgages on homes in areas most affected, and on inflation and interest rates if food prices rose rapidly. Concern about climate change was the top issue that BlackRock’s clients around the world raised with them: How should they modify their portfolios?
Stand back a moment. It is easy to poke fun at billionaires flying to a posh Swiss ski resort to listen to Greta Thunberg. It is easy to attack the Davos elite, the ultrawealthy financial and business leaders whose lives are utterly disconnected from the rest of us, yet feel free to lecture us on what we should do.
It is worth also pointing out that BlackRock is coming quite late to this. Many asset managers have responded to customer pressure by divesting of carbon-intensive investments and switching to renewables. Last summer the world’s largest sovereign wealth fund, that of Norway, announced that it would sell many of its investments in fossil fuel companies. The irony here is that the fund was built up on Norway’s North Sea oil revenues.
Whatever you think of the fundamental issue – the scale and dangers of climate change – these concerns will not go away.
The whole financial services industry will be changed by it, as Mark Carney, outgoing Governor of the Bank of England, recently warned.
Interesting that he has just been appointed by Boris Johnson to advise on preparing for the UN climate change conference in Glasgow in November. As Larry Fink points out, these concerns will have a profound effect on investment flows.
So what should we do about all this?
Two points. The first is to recognise that huge financial resources are going to be thrown at the problem. Finance has become frightened, and that is good. Some of that money will be very effective and investors should be duly rewarded. Other investments will not do so well.
Indeed there is a risk that investment in decarbonising the world economy will become too fashionable, and money will flood in without proper scrutiny.
The other is that nothing changes overnight. Oil and gas will be the main sources of primary energy for another 30 years, maybe longer. Look how long it has taken to switch away from the most polluting of the carbon fuels, coal. Germany has just announced that it is stopping using coal for electricity generation – but not until 2038.
We should not underestimate the scale of the change that is coming. But we should not overestimate the pace at which it comes. That leaves a dilemma for investors. One the one hand it must be right to try to find the next generation of winners from the drive to combat climate change. It makes financial sense as well as ethical sense to do so – however tough it is to sort out the wheat from the chaff.
On the other hand it would be silly to reject the security of solid returns from established industries, including those in conventional energy.
In addition, if they are wise the big oil and gas companies will have a key role in the transition away from what has been their core business. Royal Dutch Shell yields more than 6 per cent – and has never cut its dividend.
The big point here surely is that the financial services industry, for all its imperfections, its greed, its hypocrisy and often its stupidity, is responding to a profound global concern. About time too.
Massive resources will be thrown at the problem