In a recent meeting with a London based fund manager, an investment case was made for a macro bet to be made on the secular shift towards fiscal expansion in one of the countries most famed for their discipline and steadfastness in this area, Germany. What was interesting, however, was that this policy shift looks not to be as the result of a clear need for stimulus in light of the ongoing economic slowdown in the region, but to address a far more topical issue - climate change.
The topic of climate change is not a new one, but a recent confluence of social activism, political campaign airtime and changing behaviors has cemented its place squarely in the public eye. Recently, consumers have begun driving change in corporate attitudes towards environmental affairs through the vehicle that can have the most influence - their spending. There's been a large shift by the consumer in developed markets towards actively purchasing products that they deem more climate friendly and steering away from brands that that are less proactive in the space. This change can be observed across both high-end and low-end product categories and interestingly is not isolated to the upper class. Consumers are also much more likely to boycott a previously favored brand or company in response to perceived “climate-negative” company policy, however it must be said they tend to revert with time. [i]
As pressure continues to mount on governments and corporations, policymakers are beginning to take significant steps towards inclusive climate policy at a national level. Germany has just announced a deal on its climate protection package to the tune of EUR55bn, which includes carbon pricing for buildings and transport, as well as a higher air traffic tax. However, sceptics have questioned whether the German government is doing enough to address climate concerns - as despite the scale of the package, it remains committed to the self-imposed "black zero" policy of no fiscal deficits. The policy is intended to be self-financing, with higher government expenditures and lower revenues offset by additional income through targeted higher tax rates and levies, as well as the addition of carbon pricing for households. This came as a surprise to many economists who had previously called on the German government to use the environmental challenge as a reason to spend heavily after years of fiscal prudence.
As a capital allocator, Parkview has a responsibility to invest in a way that is not detrimental to society or the environment. The challenge has always been to ensure that this consideration is not at the expense of our client’s returns. In the past, ESG investing has penalized the investor during certain periods, whilst rewarding them in others.[ii] A recent study by Deutsche Bank, however, shed light on some compelling evidence that shows how company stocks are being priced at a premium owing to “climate-positive” press coverage. Using their in-house AI platform, which mapped stock prices to announcements and news articles from 1600 global companies over the last 20 years, there were some surprising findings. Companies that were the subject of an improvement to news and announcements relating to climate matters saw an outperformance of 26% vs the MSCI World Index over the period analyzed. On the contrary, those that were the subject of increasingly negative news saw an underperformance of 5%.
At a macro level, climate change will have a significant influence on future regulation as well as on fiscal policy. Allocators will need to incorporate environmental considerations directly within the investment decision via; 1) Investing in companies that are actively improving their environmental impact 2) Allocating to accompanies/industries that stand to benefit from decarbonization 3) Underweighting those industries that are likely to face increased costs and lose competitiveness as a result of structural changes.
Whilst policy interventions such as the one we have just seen in Germany are encouraging, it remains to be seen whether governments will begin to enact the level of reform needed, and with the conviction that is required, to stem the tide of climate damage - now that consumers and investors are having their say.
At Parkview, we try to consistently integrate ESG factors into our overall asset allocation and fund selection process in a pragmatic way. We note, for example, that environmental concerns are incorporated into the strategies of most of the equity funds in which we are currently invested. The challenge of course, is to ensure that these concerns are addressed by the fund in a manner that delivers performance to our investors, rather than predominately as an effective marketing tool.
[i]Deutsche Bank Research. (2019). Past the tipping point with customers and stock markets.
[ii]Amundi Research & Macro Strategy. (2018). How ESG Investing has impacted the asset pricing in the equity market.