IFAM: What are the potential headwinds and challenges that you believe advisers and investors need to be aware of?
RS: Unfortunately, due to Covid and the economic shutdown, the amount of debt at every level of society has greatly increased. To change our carbon behaviours effectively will require a lot of capital. The problem is there are governments globally with huge amounts of debt, in most cases at levels not seen since the Second World War. This will hinder their ability to progress effectively, especially if interest rates start to rise.
To replace your fossil fuel and electricity production with renewables requires capital, to transfer hard-to-electrify industries to green hydrogen requires capital and to get everyone recycling requires infrastructure build-out. This capital is needed at every level: consumer, industry and government. It is estimated that over the coming decades the UK is going to need £1.5trn and the EU €10trn (£8.55trn) to start hitting their long-term carbon targets*.
Due to the covid debt build-up, governments will likely raise taxes going forward. The question is which sources they raise from. The idea of a carbon tax has been mentioned by the US treasury secretary Janet Yellen. A more effective price for carbon and carbon-emitting activities will help our transition. As carbon is more and more considered a de-merit activity, like alcohol and cigarettes in the past, governments could use this as a potential source of taxation and income.
IFAM: Is economic growth good for combatting climate change?
RS: In the past, economic growth was always bad for the environment because the richer people became, the more their carbon footprint increased. As industrial activity increases, the more pollution you have and the more carbon you emit. This is changing, however, and we have effectively reached a tipping point where economic growth is positive for the environment.
For example, in the past you would probably have swapped your old petrol car for something bigger like an SUV if you became more wealthy, increasing your emissions. Today, however, you would likely switch to an electric vehicle. But if you are worried about your job security, what are the chances you would make such a large purchase with confidence?
It is economic growth that provides the opportunity. We have the tools today to decarbonise, but it requires capital and confidence.
IFAM: What do you expect will be the growth areas going forward?
RS: One of the main growth areas is likely to be green technology, whether it be geothermal, hydrogen or semiconductors. It will be technology that provides the solutions. While the effects of working from home and less business travel because of the pandemic have helped out on the climate side, there has also been a negative. Most countries are now emitting more carbon than pre-Covid-19. For example, people are worried about the confinements of public transportation so they are making more trips by car.
While we need to focus on the areas that are positive, such as remote working and cleaner business practices, at the same time we must push forward in areas like the adoption of electric vehicles and providing the infrastructure to speed this up. Again, Europe and the UK are leading the way, with the UK committed to banning the sale of new combustion vehicles by 2030.
*https://on.ft.com/2Qj4HsI
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.
About Randeep Somel
Randeep joined M&G in 2005 as a fund managers’ assistant on the equities team. At different stages between 2013 and 2019 he was fund manager or deputy manager of the Global Themes, Managed Growth, Global Recovery, Global Select, Pan European Select and Positive Impact strategies. In November 2020, he became manager of M&G’s newly-launched Climate Solution strategy. Prior to joining M&G, Randeep worked for State Street in a fund accounting role. He graduated from Birmingham University with a degree in economics in 2003. Randeep has the IMCand is a CFA charterholder.
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