WHEB Commentary

George Latham

Name dropping in the examination schools

To Oxford’s Examination Schools last week for a much more inspiring, less harrowing experience than my last visit 20 years ago when I was sitting my finals. And this time I didn’t have to wear ‘sub fusc’. I was there as a participant in ‘Resource 2012’ a collaboration between Sir David King’s Smith School of Enterprise and the Environment and the Rothschild Foundation, and featured a very high profile line-up of politicians, academics, business leaders and investors for a two day conference focused on managing natural resources, longer term thinking and aligning people and profit. Speakers included Hans Rosling (founder of Gapminder.org), Professor Amartya Sen (Harvard), Jeremy Grantham (founder of GMO) and Amory Lovins (Rocky Mountain Institute), alongside politicians including David Miliband, President Paul Kagame of Rwanda and President Bill Clinton, together with broadcasters and journalists such as James Harding (Editor of the Times), John Micklethwait (Editor of the Economist), John Landau (Producer of Avatar) and Sir David Attenborough (no introduction required…) Business leaders included Sir Terry Leahy (former CEO of Tesco), Jean-Marc Huet (CFO of Unilever) and Peter Brabeck-Letmathe (Chairman of Nestlé).

The conversation ranged widely around the subject of resources, energy, water and food and the urgency with which action is needed to tackle looming, and in some cases current, crises in the availability or distribution of resources. Much of this is clearly known to us already and is core to our investment strategy. However, it was striking to hear these issues being debated by such a high profile and mainstream congregation.

The importance of resource efficiency

It would be very difficult to synthesise the content into a short piece here but there were a number of themes that stood out. The main focus of the conference was on efficiency and the ability to profitably generate cost savings through demand management. This represents one of the most significant features of our investment stance and is something that we are very familiar with. But there were some striking examples laid out at the conference, both in terms of the proximity of the crisis and the opportunity in response. Peter Brabeck-Letmathe, for example, demonstrated how global demand for water has exceeded available supply at a global level since 2005 and that the gap is rapidly widening. Opportunities and threats were also eloquently described by many, including Amory Lovins, one of the world’s leading experts on resource efficiency, and in data supplied by McKinsey’s Global Institute, demonstrating that “companies that strategically cut emissions were more than twice as profitable as those that did not.” Both Jeremy Grantham and John-Marc Huet also highlighted the downside risk to companies that are not prepared. Huet referenced a 2008 report from AT Kearny suggesting that companies in certain consumer goods sectors that do not implement sustainable environmental strategies could face a potential reduction in earnings of 19 to 47% in 2018.

Sustainability is good for business

This kind of data is very supportive of our investment approach. Firstly, we invest in companies providing solutions to sustainability challenges, therefore those companies providing the tools that other businesses need to enable them to ‘strategically cut emissions’ fall full-square into our universe, and secondly, our integrated approach to environmental, social and governance analysis directs us towards companies that manage their own resources efficiently. Recent research published by Deutsche Bank adds academic rigour to the claims. Having reviewed more than 100 academic studies they found that: “ESG factors are correlated with superior risk-adjusted returns at a securities level.”

Coalitions of the willing

The problem that undermined progress at Copenhagen and every UN climate conference since then has been the monolithic structure of decision making where it is expected that 192 countries would sit down together and come to a single agreement which can be blocked by any one of those 192. There is now a clear understanding that this process was never likely to achieve ambitious targets or frameworks, and a new multi-stakeholder way of working has emerged to move ahead through ‘coalitions of the willing’. Examples of progress at Rio+20 include the CEO Water Mandate where 45 CEO’s made explicit commitments to managing water resources and the US Water Partnership which involves 41 separate agencies varying from government agencies and corporates to NGOs and academia. The US government announced a partnership with more than 400 companies and brands in the Consumer Goods Forum (CGF) to achieve zero net deforestation in their supply chains by 2020. In the financial sector five stock exchanges, including Nasdaq, collectively listing over 4,600 companies, committed to encourage listed companies into disclosing details of their environmental and social footprints.

Pricing of externalities

Another theme that ran through the conference was around the direction of policy and pricing of externalities. Data recently reported by the IEA showed that fossil fuels receive $400bn per annum in subsidies which is roughly five times the level of support given to renewables. This clearly creates a significant market imbalance, and is a counterpoint to the often cited view that it is the renewables industry which is reliant on subsidies and government support. Contrary to popular conception, a number of speakers pointed out that many of these support mechanisms are actually regressive in nature, for example, supporting spending on fuel to run appliances/vehicles which will only be owned or used by the middle classes. Linked to this was a broader theme that policy needs to support the proper pricing of externalities. However, the obstacles to achieving this are clearly very difficult. Lord Mandelson cited an example in Indonesia where an attempt to remove a fossil fuel subsidy had been abandoned due to large scale public unrest.

Resource2012 was an inspiring and educating event, significant for its audience and its participants. The conversation ranged widely but centred around two principal threads, the urgent need for action and the potential opportunity for those at the vanguard of change.

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