Belated Happy New Year wishes and thank you to you all for reading our newsletter. More importantly, Thank You for continuing to support our Climate Assets Fund. We doubled the fund size during 2021 and we proudly finished the year with over £330m in assets under management. Also, Climate Assets delivered another strong year, with returns outperforming the peer group (+13.24% versus +10.94%, Financial Express as at 31/12/2021) and once more proving sustainable investment sceptics wrong.
2022 is set to be another year where stakeholders are focusing on ESG and sustainability. So, let’s explore a few current topics around the E, the S and the G, in ESG.
Reaching a turning point
When it comes to the environment and particularly clean energy financing, some investors feared a bubble last year, while others, like us, saw a turning point. Notably, clean energy accounted for most of the additions to power generation across the world and renewables were a growth engine for many economies. We agree that whilst renewable energy will never solve the problem of climate change on its own, it remains a critical part of the solution. Regarding carbon footprints, understanding how to report on Scope 3 carbon emissions is critical for those companies that want to lead the way. As a reminder, Scope 1 reporting covers direct carbon emissions, Scope 2 covers indirect emissions from purchased power and Scope 3 covers all emissions, including those from the value chain.
As Covid continues to drive labour shortages in many countries and particularly in critical industries, like semiconductors, workers are seeking to capitalise on their scarcity value. As a result, the ‘S’ in ESG is likely to be front of mind for workers and shareholders alike. We anticipate that investors will be more willing than before to vote on social issues, like pay and diversity for example, as the pandemic continues to change the way we look at the workforce and how we value talent. If anything, the pandemic has shifted mindsets when it comes to recruiting and retaining an agile workforce.
Last year’s preparation work for COP26 drove corporate boards and executives alike to increase their commitments to sustainability goals and to identify the paths to net zero. They are no longer debating why corporates need to focus on ESG but how to do it in a credible, consistent, and effective manner. Governance has taken centre stage, and it will underpin a year where we realise once more that linking executive remuneration to ESG targets is critical to delivering net zero.
Regarding ESG ratings, we feel that our approach of avoiding scores but focusing on qualitative analysis, was validated during 2021. We saw a great deal of consensus across investors, market commentators and regulators that ESG ratings are not comparable and most of the time create confusion and greenwashing risk. The main issue is that there is very little agreement among rating agencies around methodologies and what best in class looks like. At Quilter Cheviot we continue to use research, analysis and judgment to underpin our ESG assessment across our portfolios.
Finally, “Don’t Look Up!” - this highly hyped movie is supposed to educate on climate change, but it fails to deliver, in my view. The movie is about a comet collision that is used as a metaphor for the climate crisis and the world’s slow response to the warming of the planet. Is it a comedy or a satire? Hard to tell. The comet in this film hits the planet within six months, whilst climate change is a multi-decade issue, thus the metaphor does not quite work. As we have seen many other incredible collisions before in the big screen, for me, the most memorable moment is not the collision itself, spoiler alert, but the Brontoroc’s explainer.”