Davos 2020: The time for talking is over

"Do we want to go down in history as the people who did nothing to bring the world back from the brink in time to restore the balance when we could have done? I don't want to." Prince Charles, World Economic Forum 2020, Davos

The time for talking is over

I attended the 50th annual meeting of the World Economic Forum in Davos this week. This year's theme was: ‘Stakeholders for a Cohesive and Sustainable World’. First-time attendees are often sceptical about the value of the event, not least due to the air miles accumulated to discuss climate change. However, we left with a list of tangible actions and tangible outcomes.

Investors have a crucial role to play: how we invest today will determine the world we live in tomorrow.

This is a unique gathering of global leaders from government, business and society. We will need to work together to build a sustainable world. And investors have a crucial role to play: how we invest today will determine the world we live in tomorrow.

ESG moves to the main stage

Environmental, social, and governance (ESG) issues have always been on the agenda at Davos, but historically these discussions have been held on the fringes. This year, they took centre stage.

In advance of the event, the World Economic Forum issued its annual Global Risks Report. It highlighted that “climate change is striking harder and more rapidly than expected”. Environmental issues represent the five most likely risks identified – and three of the top five ranked by impact. These impacts are real: rising sea levels, increased weather events and loss of habitat.

Greta Thunberg, the teenage activist, admonished global leaders for doing “basically nothing”. Prince Charles called for a new economic model. What could this look like?

I believe it will need to involve a new approach to both public and private capital allocation.

New goals, new measures

Investors will need to develop broader measures of success: looking beyond traditional risk and return metrics. This will create different incentives and drive a change in behaviours.

The United Nation’s Sustainable Development Goals (SDGs) provide a widely-accepted framework for this broader agenda. They include a series of indicators to measure progress for governments. A range of organisations are developing similar measures of impact for companies and investors. These monitor human, social and natural capital, complementing existing measures of financial capital.

These measures can shape investment decisions.

In the Aberdeen Standard Investment café on the main thoroughfare, our Chairman, Sir Douglas Flint, hosted the launch of a report from The Economist Intelligence Unit on “The future of public spending”1 . The report concludes that using the right measures is vital to driving development. This can encourage the innovation needed to meet these goals.

Creating the incentive to invest in a low-carbon world

The economic backdrop creates challenges for investors. But it also creates an incentive to finance the needed transition to a low-carbon world.

We expect a continuation of the slow growth, low inflation environment, leading to compressed investment returns. This environment has driven long-term interest rates to levels never seen in history – and we expect these ultra-low rates will be with us for a long time. In turn, this makes it challenging for individuals to save enough for their retirement. Indeed, the World Economic Forum projects that the global retirement savings gap will grow to around U$400 trillion by 2050.

As a result, investors have a powerful incentive to seek alternative sources of returns. The expected returns available from clean energy are currently attractive relative to many other investments. These investments also offer an opportunity to diversify the sources of return. This allows investors to allocate capital in a responsible way – ways that meet their values – without sacrificing potential returns or increasing expected risk.

Amanda Young, our Global Head of Responsible Investment, and I led a discussion with leading academics on the importance of Capital Allocation for a Sustainable World. We presented the findings of our three major studies on climate change, which tackle the issue for different audiences: economic policymakers, investment analysts and asset allocators (available on our Responsible Investing website).

Our discussion highlighted that tackling global warming goes beyond investment in physical infrastructure, such as wind turbines and electric cars. Professor Jonathan Haskel from Imperial College, and author of Capitalism Without Capital, pointed out that the real solutions come from knowledge and knowhow. “Expanding company reporting to include these intangible assets can only help to make these investments more effective.”

Time to act

This year, it is critical we up our ambition to tackle climate change. The physical impacts of climate change are being felt across the world; with record temperatures, severe floods and devastating fires. Public pressure to act has never been higher. What we commit to do this year will determine life on this planet for decades.

Asset managers have a critical role to play as we make the necessary transition to a low-carbon world. At Aberdeen Standard Investments, we consider ESG risks – and opportunities – as an integral part of every investment decision. We look to influence corporate strategy through our engagement with management. And we are vocal about the need for stronger policies on climate change.

The investment industry needs to act – and be seen as acting – in the common good. Investors cannot be passive observers of the impact of their activities. Every investment has an impact on the future – both positive and negative. The bedrock for our industry is its fiduciary duty of care to clients. This duty must include actively managing this impact on society.

New active management will shift the focus of investment, away from an obsession with relative returns. Our industry will need to provide investment solutions to the financial outcomes required by our clients. But responsible investing means managing environmental and social outcomes too.

Investing for a better future

Investing for a better future is our corporate purpose. We seek to practice what we preach. For example, we have pledged to be carbon neutral from now on.

But we cannot do it alone. Over the week, Sir Douglas, Martin Gilbert and my team met with academics, policymakers and other global leaders to help understand how we can achieve our goals – and yours. We met over 50 current and prospective clients to discuss how we can align our efforts.

The path ahead is not clear but we did reach consensus on one thing: we must act, act now and act together.

1 The essay was supported by UNOPS, the UN organisation with a core mandate for infrastructure and procurement. It argues that the way we spend is critical to meeting the SDGs.

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Risk warning

Risk Warning

The value of investments, and the income from them, can go down as well as up and you may get back less than the amount invested.