Today marks the final day of this year’s World Economic Forum meeting in the Swiss ski resort, Davos. With a host of world leaders up in the Alps discussing the headline theme ‘Stakeholders for a Cohesive and Sustainable World’, climate change has taken centre stage.
Perhaps unsurprisingly then, US President Donald Trump and Swedish climate activist Greta Thunberg have been the most mentioned people in the news and on social media over the week.
Their staunchly opposed views might have been an easy draw for the world’s media but is there a danger their polemic politics miss the point?
Cohesive and sustainable?
If we look past the sniping comments towards Thunberg from Trump and US treasury secretary Steven Mnuchin, we see a President resolute on protecting jobs and the US economy, and not yet ready to accept the world’s concerns over climate change. On the other hand, we saw Thunberg call for all institutions to “immediately halt all investments in fossil fuel exploration and extraction, immediately end all fossil fuel subsidies and immediately and completely divest from fossil fuels.”
Perhaps you need these two uncompromising characters to situate the conversation. But despite the bolshie rhetoric calling for support at the extremes, for investors there should be a much more nuanced takeaway.
Trump aside, most world leaders acknowledge the need to address climate change, even where it poses potential hurdles for them - Angela Merkel and BlackRock’s Larry Fink were two notable figures to plainly state that global warming cannot be ignored. But, they also accept there are no quick fixes. Saudi Aramco boss Amir Nasser challenged the viability of Thunberg’s immediate call to arms, saying: “There is a simplistic view that this is something that can happen overnight and we can move to renewables and electrification in no time, the world will be much better and there will be zero emissions.
“Investment takes time – it takes five to seven years to build a project to make sure ample energy is available, because if it is not affordability is an issue and it will have serious implications for developed countries.”
The corporate world is finding it’s not a case of hitching their cart to one of the extremes, in fact where their own long-term sustainability is concerned, companies will have to work hand in hand with regulators and policy makers to ease the transition.
A wholesale blacklisting of companies exposed to fossil fuels prevents major shareholders from exacting change for the better. Where firms do accept the prospect of change, they need to be supported, not least because some of the big names in the spotlight hold importance for more than those working there.
Retirees and income investors rely on the likes of Royal Dutch Shell for their dividends. The company itself has stated their aim is to find “a way to preserve that dividend-paying capacity, while at the same time growing the value of the company, while at the same time also changing the make-up of the company.”
In this sense, corporate financial sustainability will come from greater attention to environmental, social and governance (ESG) standards, regardless of our view on climate activism. Reducing firms’ risk of fines from regulators, or the risk of simply becoming obsolete is in investors’ best interests as well as those of company bosses.
Investors need confidence in a firm’s ability to be here in 10 years. Firms truly recognising this and adapting, rather than paying lip service to new trends, put themselves in a position to attract long-term investors. If they don’t they create a large gap in whatever competitive advantage they have currently. Seeing sustainable practices as a fad that will hopefully go away misses the point and allows nimbler propositions to leapfrog transitionary periods wherein current firms will have to spend money to adjust supply chains etc. and get going to meet new needs.
The butting heads at Davos might not like it but the transition to a sustainable future will require compromise. The direction of travel is clear and while some with their nation’s jobs in mind might take more convincing, corporate vulnerability can, and will be forced to, be reduced by a commitment to more sustainable practices, the rejection of which will ultimately hit jobs harder.
Read more about ESG investing here.
Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
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