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Time for industry to act as force for change

Time for industry to act as force for change

This year promises to be once again filled with uncertainty. Brexit will rumble on, bringing further volatility and polarising the UK political dialogue; China and US relations will remain tense and concern markets, despite a possible partial trade deal being secured before the end of 2019; and the US presidential race will be drawn out and likely unsettling for world markets.

However, when history reflects on 2020, it could well be marked by a more significant event. 2020 will see the UK play host to COP26 – the innocuous-sounding but critical United Nations climate change summit.

The conference is intended to produce a coherent and coordinated international response to the climate emergency. It will be the biggest summit the UK has ever hosted, with up to 200 world leaders expected to attend, along with 30,000 delegates.

A previous incarnation of this annual conference – COP21 – produced the Paris Agreement of 2015. This year’s iteration is set to raise the bar once again.

Countries are due to submit updated climate plans to bridge the gap between varying national pledges and the overall goal of the Paris Agreement to hold global warming well below 2°C.

We all truly hope to see significant progress and outcomes from the summit.

Nonetheless, I predict that progress from COP26 will not just be driven by the leaders of nations, particularly in light of the US pulling out of the Paris Agreement, but will be partially driven by civil society and business.

Against a backdrop of rising societal scrutiny we will see business, finance and other stakeholders having to – for pure business reasons let alone any other considerations – take their seat at the table.

COP26 will inject new momentum behind initiatives, commitments and promises on climate change and a broader range of stakeholders will have a key role to play.

As an investor with a long history of meaningful engagement with companies in which we invest on these issues, this could be a watershed moment.

In 2019 we have witnessed a profound shift in awareness of, and engagement in, the climate crisis. This was stimulated by extreme weather conditions attributed to the changing temperature of the earth.

Additionally, we are seeing more and more statistical evidence of the benefits of positive engagement around environmental challenges, as well as social and governance topics.

In July 2019, Hermes published research carried out with financial ratings company Beyond Ratings, which showed that countries with the highest environmental, social and governance score have, on average, the widest spreads, while the reverse is true for countries with low scores (see chart).

This increased awareness has been reflected in public policy such as the revision of the UK Stewardship Code for professional investors and the amendment to the EU’s Shareholder Rights Directive, compelling a longer-term view and consideration of a broader set of risks, such as climate change, in the context of investments and asset allocations. Consequently, global investors will continue to come under enhanced scrutiny.

We must act together as the force for change that the industry has the potential to be. We have long advocated that sustainable practices result in sustainable and successful performance, in turn facilitating the creation of sustainable wealth. For anyone with a pension that must be the goal.