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With the recent excitement surrounding anything renewable I thought it was high time that I contributed to the debate. Clearly the investment industry appears to have gone Environmental, Social, Governance (ESG) crazy in the past year. Investors seem to have been ready to jump on board any stock with strong ESG credentials or anything with ‘renewable’ in the title.
Such steps are absolutely right in every sense whether it’s E, S, G or renewable specifically, and it is correct that we should increasingly treat more harshly those choosing not to embrace the relevant issues. On a personal basis I actually find this easy to support as I personally support all of the above and the fund I run is always trying to seek out ‘tomorrow’s companies’ and tends to invest less in industries or stocks that may be on the wane - for instance I have never invested in a tobacco stock, not because I don’t think they may offer value but rather more that I simply believe they are not companies for the future - for me the stock market is ultimately about providing equity capital for companies to grow.
It is for this reason I have found it an exciting time to invest in the UK where we have some great opportunities and world-leading technology. For instance, the fund currently has positions in two Hydrogen companies, ITM Power and Ceres Power, we hold Pennon and Biffa for the recycling, National Grid for the need to improve the electric infrastructure, Drax for the move from coal to Biomass, and Smart Metering for better use of our electricity.
Indeed, internally at Fidelity our analysts now work tirelessly not only identifying value but also their work on ESG is second to none. Our edge, perhaps in contrast to some rating agencies, is that we are attempting to encourage good behaviour, those stocks moving in the right direction or attempting to understand if a management team are trying to change - I firmly believe this is the right stance as opposed to dis-engagement simply due to not filling in certain boxes on a form, or a company simply falling into the wrong sector.
Not running a pure ESG fund means that in some areas this transition from Old to New has to be made at a controlled pace - for instance moving capital from Oils to Renewables is difficult to perform quickly due to the relevant size of the sectors and companies - for instance BP has a market cap of just short of £100bn whereas the market capitalisation of ITM Power is only just touching £600m, less than a tenth of the size.
There are, rightly, question marks over other areas - notably Mining companies - their products are essential for the new economy - materials for batteries, electrolysers or fuel cells - but clearly, they dig huge holes in the ground, often use vast amounts of water, emit lots of carbon and often have poor social records.
This relative size, and rush to invest, is causing a near term issue that some have equated to booms of the past. I use, unashamedly, a chart I was sent recently overlaying the rise of Tesla v the South Sea Company to highlight some of the current euphoria.
Source: Jeremy Grime, Charlton Illingworth 6 February 2020
Similar to the technology, media, telecom (TMT) boom it is right that we see the benefits of new technology, that clearly all around us now we reap the benefits, vastly better IT, telecoms, cost reduction and so on, but many of these companies never succeeded, a large proportion of the ultimate winners began after this period - Facebook, Twitter and so on - Amazon importantly were created in the early 90’s and perhaps Tesla is this example.
My point here is that the ESG/renewable debate will, in my view, be ultimately beneficial to us all, with a cleaner environment, better social awareness and improved governance, together with vastly cleaner and cheaper energy but we must remember our investment discipline - yes absolutely invest in these areas, but not at all costs - keeping an eye on valuation is essential, for newer companies we must control position sizes and let’s not just be bounced out of the laggards at any price.
A point of note the picture at top of the page is of the oldest, working windmill in the UK, in Surrey.
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Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. 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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