Client Update - 12th November 2021

Have we lost control of the climate? The answer seems to be yes, and the COP 26 has not been overly encouraging for delivering aggressive agreements to change that conclusion. But that does not mean we give up. Those who like to see their glass half full will want to focus on progress seen at COP26, such as the announced conversion of India to “net zero” (albeit by 2070 only) or the ambitious deal on methane. However, it is disheartening that the world’s top two greenhouse gas emitters, the US and China, as well as India, refused to join the agreement on phasing out coal. Politics are getting in the way in the US, while China’s experiment last summer with a “coal-free diet” ultimately illustrated the country’s dependence on this most harmful form of fossil fuel.

Investors have a central role to play in mobilising finance to support companies and governments that are contributing to a net zero future. More and more needs to be done. The MSCI believes that only 10% of listed companies worldwide have plans that are consistent with a 1.5-degree temperature rise and only 43% with 2 degrees. Glasgow should accelerate the pressures that investors – as owners and creditors – bring to bear on companies to get more of them to pledge to make their business models consistent with a 1.5-degree world. As such, we need to keep doing the analysis on companies from an ESG point of view to understand where they are at and where they are going, we need to stop financing the worst polluters and we need to engage even more actively to get companies to do the right thing in a material and intentional way. We might not get back control, but we can stop the worst-case scenario happening and if you would like to focus part of your investments in this area, please do speak with your adviser.

Just briefly moving back to inflation and interest rates, we are still thinking about why the Bank of England has “bottled it” last week and did not raise rates, despite telegraphing this was more than likely. There may be a price to pay in terms of credibility for the British central bank. Conversely, the US Federal Reserve (Fed) had an easy week with Fed Chairman Jay Powell defying market expectations of an endorsement of a rate lift-off in 2022, thus cushioning the impact of the announcement of tapering. The Fed’s willingness to retain maximum flexibility is a double-edged sword though. While so far, the market has taken it on the dovish side that rate rises will be slow and low, the central bank’s explicit doubts on where full employment is in a post-Covid world could ultimately convince the Fed to hike quite quickly.

We are not surprised by the equity market’s absence of reaction to tapering in the US. It is only when the Fed starts reducing its balance sheet – i.e. sells back the paper it has bought – that equity prices would fall. We have time to think about this and plan accordingly.

Have a lovely weekend.