The asset management industry faces an “existential threat”, according to Investec’s Tom Nelson (pictured), who says it never regained the trust of the public after the financial crisis
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However Nelson, head of natural resources at Investec, said one way the industry could rehabilitate its image is through helping provide solutions to the climate change crisis.
The manager said it would be a cynical move for the industry to hijack such an important issue to help with its PR, but claimed “consumers, retirees and pension fund owners are crying out for the investment industry to step up and do something”.
“I think it's just an enormous opportunity for the investment industry to generate sustainable long-term returns while, at the same time, doing good,” he continued. “And those opportunities come around once in a generation.”
In a recent article published on FE Trustnet, Deirdre Cooper, Nelson’s colleague at Investec, said environmentally conscious investors should stop obsessing about divestment – which involves selling out of companies deemed “unethical”.
This is a view echoed by Nelson, who runs the Investec Global Energy fund. He said a better tactic than simply avoiding oil & gas companies, for example – a strategy which has produced no tangible evidence it can affect climate change – is to speak to their management as shareholders and push them towards implementing more environmentally friendly policies.
“We have this debate internally on a regular basis,” he continued. “If you look at the Institutional Investors Group on Climate Change, Climate Action 100+, ShareAction, the pressure they've put on BP and Shell to disclose better data to develop energy transition strategies, I genuinely believe that has made these companies better.
“I don't believe that a hydrocarbon company has got a place in an environmental fund. But in a standard sort of investment product… I am firmly of the view that the intelligent approach to take with BP and Shell is that of engagement and improvement and working with them, because I think these established energy companies will have a role to play in this energy transition.”
Nelson said another way the industry can help solve the climate crisis is by investing in companies whose products are having a tangible impact on climate change. There is still a perception among some investors that this comes at the expense of returns, which is perhaps understandable looking at the performance of some of the earliest renewable energy-focused funds and trusts.
Performance of funds and trusts vs index over 10yrs
Source: FE Analytics
However, recent research from Interactive Investor shows five out of six ethical/sustainable funds have outperformed their closest non-ethical “sibling” run by the same investment house over the past three years.
And Nelson said advances made in industries such as renewable energy, combined with greater awareness about environmental issues and the resulting impact on demand, mean the recent outperformance could hint at the shape of things to come.
“The world has woken up to the urgency around climate change,” the manager continued. “And depending on whose study or whose long-term forecast you read, we as a planet are going to have to dedicate somewhere between $1trn and $3trn a year to finding solutions.
Source: Investec/Climate Action Tracker 2017
“The cost of solar power has come down by somewhere between 95 and 99 per cent since the 1970s and it is similar with offshore wind. When the UK embarked on its big offshore wind directive 10 years ago, the rest of the world laughed and said: ‘That's the most expensive electricity there is. Why would you do that?’
“That cost has now come down to half of what we are committed to pay for the nuclear energy from Hinkley Point. That's £90 per megawatt and the recent offshore wind auctions were under £45.
“We've got this tailwind, because regulators, central bankers and private market allocators are going to direct vast amounts of capital towards decarbonisation over the next 30 years, and companies who are directly exposed to that will do incredibly well.”
However, he said it is vital that the industry and its customers take a level-headed approach to tackling climate change and avoid sensationalism. He believes the solution will require evolution, not revolution, which is why he has concerns about the tone of the environmental protests that brought parts of London to standstill over the past few weeks. The manager said that he is sympathetic to groups such as Extinction Rebellion, adding they have done a great job of raising awareness about the issue, but warned there is a danger their extreme position could do more harm than good.
“It's a very difficult subject,” he continued. “If there are unintended social consequences of energy transition – and a lot of people, communities and industries get left behind, and you get this social injustice – that is not going to work.
“One of my biggest concerns about Extinction Rebellion, and other groups of disenfranchised voters around the world who are agitating for change at any price, is there's a risk of that playing into the hands of right-wing populist political leaders.
“And you could argue to some degree, that Boris Johnson is one of them, but certainly Scott Morrison in Australia, [Viktor] Orbán in Hungary and president Trump, who actually have a very poor record on climate change.
“So this idea that the current system isn't working, politicians let us down and, you know, we should just sort of tear it up and just get anyone in because he or she is going to be better than what we had before – that's a particular concern of mine.
“When you get Scott Morrison standing up in the electoral chamber in Australia and clutching a piece of coal and Trump obviously pandering to disenfranchised heavy industry and so on in the US, it is deeply concerning. I'm simplifying a bit, but you get my point.”
Data from FE Analytics shows Nelson’s Investec Global Energy fund is down 18.96 per cent since he started managing it in February 2013. It is in the IA Specialist sector, where quartile rankings are not appropriate.
Performance of fund vs index under manager tenure
Source: FE Analytics
It is £43.1m in size and has ongoing charges of 0.91 per cent.