On 30 November, world leaders will convene for the 28th Conference of the Parties (COP28) in the UAE, part of the United Nations’ annual climate change conferences. These meetings serve as a platform for global leaders to deliberate and commit to actions addressing greenhouse gas emissions, climate change adaptation and building resilience.
This year has been marked by devastating climate change impacts, from unprecedented heatwaves in continental Europe to wildfires in Canada, catastrophic floods in Libya and cyclones in Pakistan. Climate scientists warn that unless immediate and drastic action is taken to reduce greenhouse gas emissions, then we can expect even more frequent and severe weather events.
COP28 holds special significance in international climate efforts, as it marks the conclusion of the first global stocktake (GST). This assessment measures nations’ progress in meeting their commitments under the Paris Agreement and outlines the steps needed for future progress. Research indicates that more ambitious targets are essential for the world to stay on track with climate goals, thus making COP28 a pivotal moment for governments to create a roadmap for accelerated climate action.
Nevertheless, there have been setbacks as some countries have chosen to scale back their climate initiatives in recent months. These changes, which includes revisions to net-zero policies and postponements in the ban on combustion-engine cars, have been driven in part by concerns about rising household bills during a cost-of-living crisis. These actions have been met with scepticism among climate scientists and advisory bodies, such as the Climate Change Committee in the UK.
Socially Responsible Investing (SRI)
For some time in our client webinars, we have emphasised how governments must take the lead through policy changes and increased legislation in order to keep us on the path to a sustainable future. Given this perspective, a legitimate challenge to the viability of socially responsible investing (SRI) is: has SRI reached its limits? At Ellis Bates, we believe that this would only be the case if global environmental and social challenges were already solved, which is far from the truth. Sustainable companies, and therefore SRI portfolios, still have substantial room for growth and positive impact.
While SRI markets are facing challenges, broader market conditions (namely high inflation and rising rates) continue to impact share prices. This is because SRI portfolios often focus on companies in expanding industries with strong earnings potential, yet these prospects may be eroded by inflation. In discussions with fund managers, we are encouraged that, from a financial perspective, the companies in which our funds invest exhibit no fundamental issues. From a sustainability standpoint, those same companies are taking proactive steps towards sustainability, irrespective of government initiatives. This puts them in a strong position to confront both present and future environmental challenges.
While we appreciate that market downturns can be unsettling for investors, the recent market pullbacks have resulted in the investable universes for many of our SRI funds broadening and presented potentially attractive entry points. Over the years, several fund managers have expressed their frustration to us that certain names looked compelling in terms of their high quality, but they were commanding excessively high premiums to the market. Recent falls in share prices have, in some cases, reduced those premiums and created a more compelling investment case from current valuations.
We are continually challenging our conviction in our funds, regularly reviewing and re-evaluating our confidence in our investment decisions, following which we are pleased with how they are navigating an extremely difficult period. Our funds are led by experienced management teams committed to their investment principles, which puts them in a position to provide excellent financial and non-financial results over the long term.
In summary, as we approach COP28, it is clear our world faces significant environmental and economic challenges. Despite setbacks in climate initiatives and market uncertainties, we remain committed to the untapped potential of SRI as a means of sustainable change. Our fund managers’ dedication and the resilience of the sustainable companies in which they invest reinforces our confidence in delivering positive financial and non-financial results over the long term. Thus, we remain optimistic about turning these challenges into opportunities for positive change on the path to a sustainable and resilient future.
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