Posted inESG

Too early to jump into ESG with both feet

Its influence is growing but diversification remains vital, says one investment manager.

As the dust settles from the 26th Conference of Parties (COP26) in Glasgow, multi asset managers say it will take time to understand what impact the agreed pledges will have on investment markets, reports our sister publication, International Adviser.

While COP26 looks to have more political than investment impact, Chris Rush, investment manager at Iboss, said investors would be unwise to ignore the outcomes of the event. Instead, to reflect the changing mindset as things progress, he said investors should consider an ESG perspective when selecting investments.

“However, we would caution against packing all your belongings and throwing them onto the ESG bandwagon,” he said. “Many of the discussion points and agreements are likely to tale a long time to come to fruition.”

He added that depending on their exposure to traditional resources, some countries and industries will take longer to adapt than others.

“The initially more extreme wording surrounding coal at COP26 was watered down by the close,” Rush said. “Some countries like Canada have faced both internal and external criticism regarding the severity of the climate action they have proposed.

“As multi asset investors, we feel it is essential to maintain diversification whilst acknowledging the growing influence of the ESG agenda,” he added.

Low cost power

For Ryan Hughes, head of investment research at AJ Bell Investments, the immediate takeaway from COP26 is that it will be the capital markets that provide a vast amount of money to drive the energy transition.

“There are already huge sums going into decarbonisation products and this will only accelerate in the coming years, which should provide a long-term tailwind to those companies involved in this space,” he said.

Hughes added that it was disappointing to see the likes of China, India, Russia – and in some instances the US – not sign up to some of the key pledges, with their desire to continue strong economic growth outweighing their impact on the planet.

“For China and India, access to low cost power is vital for their continued growth and their rise to being the largest and third largest economies in the world by 2030 look unencumbered,” he said.

“I am sure ESG investors will be looking closely at these countries to see whether the politicians actions are enough to drive meaningful change and keep even their weaker pledges on track,” he added.

Energy transition

In terms of assets, Darius McDermott, managing director of Chelsea Financial Services, picked out infrastructure as being in a good place after COP26.

“There are significant opportunities around the world in the energy transition and the sector is uniquely positioned to capitalise on the move to a greener energy mix,” he said.

“While all the focus has been on the US trillion dollar infrastructure bill, it’s not clear when or how that money will be seen and used,” McDermott added. “As such, the more immediate opportunity is in renewables, and in the EU with the direct EU fund payments for a sustainable/green recovery.”

Indeed, McDermott noted that many investment trusts in the renewables space are trading on yields north of 5%. In a world of zero at the bank, he argued this is very attractive.

“Before the event, the manager of FTF Clearbridge Global Infrastructure Income did say that he expected to see a lot of hot air (no pun intended) and not much action from the event itself,” McDermott said. “He thought more changes would instead come from businesses post the conference. So while it may seem a bit disappointing now, don’t assume it is over.”

Sustainability stand off

While governments have a key role to play, Justin Onuekwusi, head of retail multi asset funds at LGIM, said it feels that change will also need to be, in part, led by the private sector.

“The asset management industry has a key role to play in this,” he said. “As stewards of investors’ capital, it is only right that larger asset managers must take responsibility in engaging with business to help drive the change we want to see.”

In term of the summit itself, Onuekwusi noted while there were positives from the last couple of weeks, he added there now appears to be a stand off.

“The larger emerging economies point to the unfairness of the total cumulative emissions of the wealthier economies since the industrial revolution, which dwarves their own,” he said. “As such they are demanding that the $100bn economic costs agreed need to be shared more.”

Part of the Mark Allen Group.