Responsible Investor

they are in the fast flowing part of the river, so to speak, on this, and others will silt up on the left bank. We see these effects already with the taxing of gas-guzzler cars in the City of London. These kinds of issues will change economic behaviour. There will be winners or losers that are not discounted. We just had our European institutional investment conference recently. I asked the question whether climate change could be a significant driver of earnings in the next five years. Only 30% of the attendees said yes. It seems to me that this is good news if you’re investing in this theme because it hasn’t been taken into account.”
Brown says the fund is eschewing the benchmark in favour of conviction: “If you believe in a theme you don’t want to wait until the market capitalisation reflects it, you want to overweight it before it happens. We are building a diverse portfolio, but we’re not paying any particular attention to market cap weight, either by geography or by industry.” Brown, who also sits as a pension fund trustee, says the aim is to buy cheap stocks that will profit from the trend: “As a trustee, I hear fund managers who say: “we buy good companies”, and I’m always waiting for them to finish the sentence. A priori, I don’t know why you would want to buy good companies particularly. I need to know that it is a good company and that it is relatively cheap. If it’s already fully discounted in the price, then I would much rather buy a bad company that has the potential to become a good company and get re-rated.”
Simon Webber, global sector specialist at Schroders, who co-manages the fund, says the UK Stern report

on climate change was a seminal moment for financial markets: “One of Stern’s key findings was that to avoid the 50% chance of a five degree rise in temperatures we will need to cut greenhouse gas emissions to 25% of their current level. A 75% cut in greenhouse is an absolutely massive transformation of the global economy and has to touch every sector.
“There is an emerging consensus, at least in Europe, that emissions levels need to be cut by 50-60% by the middle of the century, and that means there is a significant investment cycle ahead in making that transition.”
He adds that climate rises of 1-2% will also require huge adaptation such as not building on flood plains, investing in flood defences, and re-evaluating the insurance sector.
“Regulation is crucial to this financial analysis. The UK will pass a bill this year for a 60% cut in emissions and we’re trying to develop thinking that is ahead of the game: what are those regulatory changes going to be and how can an industry transform itself bearing that in mind. We’re sitting down with retailers and building companies, for example, and asking them where they see the changes and how they are adapting.”
Webber argues there is also a widespread mis-understanding of how non-power companies will have to alter their behaviour as a result of climate change: “You’re going to see a need for different lighting, different transport, more fuel cells. It’s a much broader theme than people think. The European Union is already considering banning incandescent light bulbs and Australia and New Zealand have already done it.”

Not a member? Register here »