Hope Is Coming

Climate-change activist website 350.org is holding a Global Divestment Day Feb. 13 and 14. The campaign provides a rally point for the raft of individual fossil fuel divestment campaigns that are continuing around the world.

Recently I spoke on a panel organized by the London School of Economics on the topic of divestment. Beyond the fact that LSE has since announced that it is reviewing its investment and policy strategy around fossil fuels, what I was struck with was the passion, intelligence and integrity of the students.

We only have to remember the role that students played in the civil rights movement to understand that students can shape society whilst the study.

But when students leave university and enter the workforce they continue to impact society as they take their values into the organizations that they end up working for.

The students of today are digital natives for whom a smartphone is more important than a car. Not surprisingly students are using technology to network globally. The success of a campaign on a campus in California is quickly translated to student groups around the world.

This capacity for what we may call 'network learning' is also going to be a core part of the way this generation approaches employment. The will come to the workforce more connected than any generation before them. And they will use their networks to support their own professional development.

What this means is that the future is bright. We are heading into an era where a company's brightest employees will not only have an understanding that climate change is real - they will know how to do something about it.

But the problem is we cannot wait for this generational transition.

Whilst we have huge respect for students who are running campaigns, Inflection Point Capital's view is that divestment is not the way to go.

There are simply better ways to respond that can make a measurable social and environmental difference whilst delivering investment returns that are consistent with an investor's objectives. Across-the-board divestment is an extremely blunt and lazy instrument. In the case of fossil-fuel companies that are the target of divestment campaigns, divestment simply means a loss of any influence over the company.

There are two ways that fossil-fuel companies can be influenced; through engagement and investment decision-making. But it is important to understand that these levers need to be used together, and not separately. The challenge with engagement that is not coupled with the ability to decide whether or not to invest is that companies do not feel that there is real pressure to change. The same is the case where an asset manager invests in a fossil-fuel company but does not engage. Without engagement, no signal is sent to management as to why the investor has chosen to invest, or not invest, in their company.

We believe that the most productive strategy for investors, is to identify companies that are the best placed to respond to mega-trends and who understand that the changing world requires innovation and adaptability, an approach that we call Strategically Aware Investing. This approach is complemented by strategic engagement, which ensures that a signal is sent to companies as to the areas where the company should focus.

In the case of fossil-fuel producers, this involves investing in companies that understand that low carbon-intensive energy and renewable energy is going to be an increasingly important part of global energy supply and who are using their strong balance sheets and low cost of capital to diversify their energy sources.

Asset owners can play a proactive role transitioning to a low carbon economy by investing in a high-performance, actively managed portfolio with a net zero carbon footprint or even better. Of course, given that same-sector exposures to climate risk can vary by a factor of 30 X or more from company to company such an approach requires painstaking, in-depth research. But the rewards, both financial and climactic, can be well worth it.

There is a wave of activism coming that will focus on asset owners. Activists won't be placated by arguments that an asset owner has an engagement strategy. They will want to see concrete evidence that an asset owner is approaching climate change thoughtfully and with intelligence, and has an approach that is demonstrably effective. In this regard investment managers have a critical role to play working collaboratively with their asset owners. Their role is no longer simply to invest an asset owner's funds. They must also assist asset owners to communicate with stakeholders.

Flux and change will define the coming decades. We better get used to it and learn to innovate and adapt - something we expect the companies we invest in to do as well. As today's generation of students enters the workforce we will have the added benefit that employers will increasingly 'get it' and not have to be convinced to act.

Hope is on the way, but let's not wait for it to arrive.