300 Club – Industry view Stefan Dunatov is chair of the 300 Club
for carbon taxes, tax incentives, state sub- sidies, stranded assets, global co-opera- tion and collaboration and the pace of technological innovation and disruption. And these assumptions have a big impact on your investment strategy compared to what looks like a smart medium-term investment strategy if you believe that we’ll fail.
Daniel Godfrey is programme director of the 300 Club
WHEN IT COMES TO CLIMATE, INVESTMENT OUTCOMES ARE BINARY
When it comes to climate there are only two potential outcomes for investing even if you’re not certain which one you’ve picked. To be fair, the answer may not always be obvious, and the path that will be travelled even less clear. Either the world will succeed in restricting global warming to levels that do not threaten a collapse of civilisation or even extinction, or we will fail (with all the repercussions of hunger, sea-level rise and mass migra- tion that brings). In this stark light, we would only ever choose to aim for the former.
Investing for success involves making a range of assumptions about the future -
Whilst every investment strategy is at least implicitly banking on the success or failure of this transition, it’s also quite likely that many investors and investment managers are unaware which they’ve adopted. Sadly, if you don’t know, the like- lihood is that you’re investing in failure. Without a conscious evaluation of the fac- tors that lead to success, it’s highly unlikely that any investment strategy will end up backing them by chance. This is important, not merely in terms of the impact on the wealth of investors/our clients, but it’s fundamental to the suc- cess of the whole transition to a low-car- bon economy. With all the collective influ- ence and powers that investors have, a successful transition is only likely to suc- ceed if we consciously invest for success. This means that we’d back renewable energy at unprecedented scale and in the infrastructure needed to store and move that energy to where it’s needed. We’d value fossil fuel reserves and high emit- ters on the assumption that carbon taxes or subsidies will be introduced that make clean energy gradually more competitive, creating more stranded assets. And we’d use our influence and, if necessary, our collective power to ensure that high-car- bon companies have strategies and incen- tives to become part of the future rather
than simply falling by the wayside. The core problem is the disconnect between the time horizons of the invest- ment chain and the crystallisation of the risks of climate change. Whilst a small proportion of investments in the real world have short pay-back periods, most investments, in innovation, machinery, factories, power stations, infrastructure and so on take many years to reap rewards. But the investment chain is impatient and the big prizes are still awarded for short- er-term outperformance of index bench- marks rather than long-term and cumula- tive absolute returns. This simply does not fulfil the true purpose of investment, which is to create wealth sustainably over the long term in a way that benefits inves- tors, the planet and society. To avert the catastrophic risk of failure, investors and the investment industry need to work together to find ways to prize and to incentivise long-term, sus- tainable wealth creation. We need to fully deploy our collective influence and pow- ers with companies, regulators and legis- lators. Most of all, we need to invest in the success of the transition to a low-carbon economy as if our grandchildren’s lives may one day depend on it.
The views and opinions contained herein are those of the authors and may not necessarily represent views expressed or reflected in other communications.
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ISSN: 2045-3833 Issue 103 | May 2021 | portfolio institutional | 13
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