Perspective

Responsible investing

"There's no wealth preservation without decarbonisation"

What’s the point of being able to afford a good retirement if we don’t have a world that’s habitable?”

Stark questions such as this coming from a large body of investors are now commonplace, says Peter Uhlenbruch – in a way that wasn’t the case just two years ago.

“The message is really clear,” he says. “People are experiencing the effects of extreme weather and linking this to climate change. They want investment returns and well-funded retirements, of course – but they don’t want to contribute to climate harm or biodiversity decline or other destructive trends.

“They understand that as asset owners they have power, and they're realising that they can wield influence where before they didn't realise they had any. The shift is enormous and fast.”

ShareAction has just published its Point of no returns report, which ranks 75 of the world’s largest asset managers’ approaches to responsible investing. What it and other work shows, Peter says, is that engagement – a term which broadly describes the dialogue between a company and its shareholders, aimed at protecting the value of the investments – is becoming much tougher.

The end owners of the investment (private investors, pension savers, charities and others) are putting more pressure on asset controllers (investment firms, who exercise control over the portfolios), who in turn are putting pressure on companies’ boards and management.

“Engagement used to be about how a company was run, or governance,” Peter explains. “Now it’s going much further. We’re seeing asset managers compete with each other to demonstrate the quality of their stewardship. It’s not just about voting at company annual meetings, it’s about imposing deadlines on companies to force change. Or actually attending those meetings in person, and speaking out in public about the change that’s needed. We weren’t seeing that until recently.”

He says what used to be “tea and cookies engagement” has now become “engagement with consequences”, where company boards which fail to change face material shocks. In some cases asset managers will stipulate a timetable for change, for example to ensure a business transitions away from fossil fuels.

“Out on the streets we’re seeing protesters angry and frustrated. They sense a tipping point. And something similar is happening inside the investment world: investment owners and managers are realising that if climate change is not managed, we will see financial destruction across many sectors. A likely consequence of unchecked temperature increases is that much of our world is uninsurable and uninvestable – and nobody wants that. Insurers themselves have said as much, and we need to know how those insurers are changing their business– or their customers – to prevent that destruction.”

The other trend he highlights is an increasing tendency to hold businesses to account. “Investors want to be sure they are not contributing to risks,” he says. “And so we’re seeing more financial institutions come under scrutiny.

"For a long time banks and insurers have been let off the hook in relation to climate change – but now they face tough questions as to how much they are supporting the carbon economy through their loans and underwriting." Overall, he says, the message that “you can’t have wealth preservation without decarbonisation” has now become broadly agreed and accepted. It’s what comes after that – the process of how a transition away from carbon is implemented, accelerated and regulated – that remains a hotbed of discussion and unresolved dispute.

Overall Peter Uhlenbruch is optimistic and energised by the change and passion he sees in the investment community.  “There is a new, much wider understanding of risk,” he says. “It’s more global and it’s more fundamental, in that it’s clearly linked to society and the environment.

“We’re all starting to look at the businesses in which we own shares and say: ‘are we happy with how you’re approaching that issue? Because if that’s your attitude to that one crucial issue, what does it say about everything else you do?"

This article is issued by Cazenove Capital which is part of the Schroder Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. All data contained within this document is sourced from Cazenove Capital unless otherwise stated.

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