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Climate Assets monthly update: Holiday Musings

Date: 12 September 2022

As I read an article from The Times titled ‘Britons help Spain back to growth, (25/08/22)’, I realise that my family is a contributor to these statistics – we are in Spain as I write. I personally do not cope well with, or particularly enjoy, hot weather. We do not go to Spain for the sun, but in order for my teenage son to improve his Spanish.

Unfortunately, I stopped talking to him in my native tongue when he was in nursery, as I was concerned his English was not as advanced as his peers. Luckily, I can say that after several such educational holidays his vocabulary has grown, his sentences are getting longer, and he understands a great deal. He has reached a turning point and I look forward to the day when he can have a conversation with his grandparents in Spanish.

Growth stocks have been hit hard

A different kind of inflection point, but one that I am also keen to reach, is the turn in equity markets. This year has been very challenging, with virtually nowhere to hide for investors. Growth stocks have been hit hard as a global de-rating of equity prices has occurred, driven by higher interest rates. This adversely affected market values of growth companies, Climate Assets’ sweet spot. Overall, sectors we do not invest in, like energy and mining, have provided the strongest returns this year so far, which, in relative terms, has put further pressure on the Climate Assets Fund. This weakness in security prices has not been confined to just equity markets; fixed interest has also experienced significant falls. This has been largely due to the same reason, a backdrop of stubbornly high inflation, resulting in central bank interest rate hikes.

It is possible the market has further to fall; the average bear market recession drawdown is around 35%. Undoubtably, this is a very challenging environment, but over the longer-term remaining invested is essential - even if it is uncomfortable when in the eye of the storm. Whilst it is hard to know if the worst is behind us, we think we are approaching better value in markets. Recent falls in energy prices are giving some indication that inflation may have peaked in key regions. The questions are really whether companies’ earnings have stabilised or when will analysts’ estimates start to revert from downgrades to upward revisions. Talk of interest rate cuts at the end of 2023 is a glimmer of hope. However, timing the bottom of the market is notoriously difficult. Easier said than done.

Under the current market backdrop, ESG integration has become very political in the US. The states of Texas and Florida have gone against sustainable investment to underpin their support for the fossil fuel industry ahead of the midterm elections. Both states are adamant that institutional investors should have a narrow focus on financial goals only. The government in Texas is forcing its state pension and school funds to divest from 10 banks and hundreds of mutual funds that it considers having boycotted the fossil fuel industry. Florida in turn ordered that the state’s fund managers exclude ‘ESG considerations’ from their investment process. Both states have effectively blacklisted fund giants, such as Blackrock, over their approach to integrating ESG considerations when investing in energy companies. 

In the UK however, despite these challenging times, investors are not shying away from responsible investment. Quite the opposite. A recent Oxford Risk study found if portfolios better reflected retail investors’ attitudes to responsible investment, over 30% of adults would invest more money. Thus, understanding investor preferences regarding responsible investment is essential.  This is a regulatory requirement, but it is a timely process, done as part of an investor’s suitability review.

Whilst still on holiday, I was interviewed by Morningstar for one of the fund managers’ profile series. When asked ‘which investor do you admire?’, with no hesitation I said Amy Domini. She is a true pioneer, a ground breaker in responsible investment.  She launched the Domini Social Index in 1990, now the MSCI KLD 400 Social Index. She is the ‘D’ in KLD. Whilst very outdated today, I still have a copy of her book, Socially Responsible Investing: making a difference and making money. I think it was the first book I ever read on SRI. Amy is now 72 years old and still championing responsible investing. She is most inspiring.

Heading home from my vacation, I am reflecting on my holiday reading – Surrounded by Idiots by Thomas Erikson. Quilter Cheviot recently organised a training workshop, where we were introduced to Erikson’s four colour framework about workplace behaviour - red (dominant), yellow (inspiring), blue (analytical) and green (stable). I presumed myself as green, just as the initial reaction of associating green with the environment. In practice, it turns out I am also quite blue and have a smattering of red and yellow too. Which blend of colours are you?

Author

Claudia Quiroz

Head of Sustainable Investment

I lead the sustainable investment team at Quilter Cheviot, dedicated to serve clients who would like to invest in companies offering solutions to the economic and environmental problems of urbanisation, climate change and resource scarcity.

Climate Assets Fund

The Climate Asset Fund invests in companies that make a positive contribution to the world, with a strong underpinning of ethical values.
Find out more about Climate Assets Fund

The value of your investments and the income from them can fall and you may not recover what you invested.