COP26: flat Irn-Bru

Irn-Bru was the unlikely winner of COP2612 , but even that lost some of its dayglo orange fizz towards the end as the talks staggered into extra time and tears. If COP26 achieved some successes, it was far from the global climate change community singing kumbaya all from the same song sheet around the campfire. Important agreements were achieved about encouraging afforestation and trying to curb deforestation (though the latter, whether in the Amazon basin, tropical sub-Saharan Africa or densely populated South-East Asia has proved to be enduringly resistant to local populations taking matters in their own hands and chopping down trees to make way for grazing land).


A consensus was reached on methane emissions, particularly from agriculture, though a new piece of research suggests that far from flatulent ruminants being the principal problem, as global temperatures rise and vast areas of Arctic tundra permafrost melt, the uncontrollable release of methane trapped for millennia will be multiples more than from any other source. But fundamental divisions remain, even after 26 COP summits spanning nearly three decades (COP1 was in Berlin in 1995): led by China and India (which targets net-zero by 2070), the resolution to prohibit energy production from coal was substantially watered down to a pledge of “phasing out”; it is amazing that after 30 years, the definition of “green” energy remains contentious, particularly the status of natural gas for which the pragmatists maintain it is a clean technology while the purists claim that whatever the defence, it remains a carbon-rich greenhouse gas and should be eliminated. Ultimately it is a political argument: particularly for gas-reliant countries in the EU, notably Germany, and for Russia whose GDP is dominated by the export of fossil fuels; pragmatically and predictably, to prevent Germany and France tearing political lumps out of each other, Brussels has determined that both nuclear and gas are ‘clean’, ‘green’ and ‘sustainable’ technologies for energy generation, further alienating pressure groups such as Friends of the Earth and Extinction Rebellion.


But further fuzziness abounds in areas such as the future financing of climate change investments and how best to achieve the transition from a carbon-based society to one of net zero. Deep-seated divisions remain about the big, global, energy intensive industries, whether as extractors, generators or users (oil, electricity, steel, cement etc): the argument polarises simply as to whether they are sectors to be helped to be part of the transition solution, or should they be demonised and starved of capital? Facing an existential threat, if their behaviours are already changing why not help them complete the process? Given they remain fundamental to a modern global economy and society for the foreseeable future, but most companies are already well engaged with the transition to net-zero, what is to be gained by pulling the rug from under them?


Finally, yet again the whole concept of carbon offsets and trading carbon credits was debated without resolution. A global industry worth billions of dollars has grown up around polluters being able to mitigate against their emissions by purchasing credits from companies with ‘surplus’ carbon capacity to sell. It is an Alice in Wonderland system with significant real costs (the price of carbon credits in Europe has increased more than 2.5 times this year from €27 per tonne to €69), but for the purists, the zero carbon believers, the off-set system is the cynical pinnacle of greenwashing, a market they would love to see dismantled. The same controversies arise over companies covering their corporate emissions by planting trees with no discernible audit trail to monitor the success or otherwise of such an activity which would need to be measured over not just years but decades.


From an investment perspective, and particularly against the backdrop of Rishi Sunak’s proposed punitive sanction regime for UK listed companies which fail to prepare for net-zero, the failure to define such fundamental parameters of the over-arching framework presents substantial difficulties and risks. But COP is an industry all of its own and the climate change circus moves on to COP27 next year when 40,000 delegates will descend on Egypt for a fortnight to discuss it all again.

Inflation, policy and the viral surge in Europe

Late in October, Bank of England Governor Andrew Bailey took to the air waves expressing concern at the inflationary risk and making it clear that the Bank might have to move as early as its November meeting to raise interest rates. By a show of 7 to 2, on 4th November the Monetary Policy Committee voted against raising rates. Bailey was one of the seven voting for the status quo, immediately earning him the accusation (the same once levelled at Mark Carney, his predecessor) of being an “unreliable boyfriend”. Reported since then, UK inflation has surged to 4.2% in October from 3.1% in September, similar to Germany’s 4.5% but so far lagging that of the US at 6.2%. The Bank itself is forecasting 5% for 2022. The MPC is minded to look at November’s jobs market data (by when it is believed that any redundancies arising from the cessation of Furlough on 30th September will be evident) before deciding whether to increase interest rates at its December meeting.


If we have been watching the Bank and the Federal Reserve doing the dance of the seven veils around the markets on the thorny subject of inflation, attention will soon focus on the European Central Bank (ECB) too. Christine Lagarde has been the most strident of the three principal central bankers that the inflationary pressure is a transitory phenomenon, there really is nothing to see, please move on. As the ECB approaches its next policy decision on 16 December, Covid is making itself felt once more across continental Europe as cases escalate rapidly. Curtailments are becoming the norm again, taken a stage further in countries such as Austria, Germany and the Czech Republic where specifically those members of the community who have failed to be vaccinated are being singled out for the harshest restrictions of freedom and movement, a move almost guaranteed to polarise political and societal opinion. It remains to be seen how much of an economic impact will be felt in the run-up to Christmas. If the ‘fast data’, the analysis of real time activity as measured by passenger transport numbers, credit card transactions, restaurant bookings etc has taken a back seat over the past few months, as every day life is disrupted once more thanks to the virus, forecasters will be poring over such data to gauge the temperature. So too will be the ECB, faced with much the same dilemma as the UK and the US: with a yawning negative real interest rate do you close the gap by raising interest rates, but running the risk of killing the economy, or do you do nothing and keep everything crossed that all will be well? As Warren Buffet is fond of saying, “it’s only when the tide goes out that you find out who’s been swimming naked”.


In Germany, where it is expected that a new coalition government spanning the rather unlikely combination of the left-leaning SPD, the conservative FDP and the left-wing Green Party will be confirmed next week, dealing with both the health crisis and the surging cost of gas will be their top priority.


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The value of active minds – independent thinking:

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Fund specific risks:

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