Thematic review - the price of everything the value of nothing
THE PRICE OF EVERYTHING, THE VALUE OF NOTHING
This quarter’s piece is motivated by Oscar Wilde’s famous definition of a cynic as a man who “knows the price of everything and the value of nothing”, a mindset which sometimes appears all too often when tackling issues of environmental and social concern. Despite the chastening period the world has experienced since the coronavirus pandemic began and the hopes that better outcomes could be achieved, much remains to be done and as ever, money and finance is at the heart of it. To set out the key issues, ‘cost’ may be used interchangeably with ‘price’ in some examples, as we often hear of the “cost” of implementing policies towards Net Zero yet rather less so about the cost of not doing so.
Let’s start with Net Zero then, the aim of companies and governments to implement policies that will equate to the increase in global emissions being kept below the 1.5°C rise targeted by COP21 in Paris in 2015. Various figures for the price of achieving that in the UK have been cited; it could be c.£50bn investment annually by 2030 according to the Climate Change Committee, or potentially higher still at a total of £3.2trillion by 2050 according to one of the National Grid’s pathways;[1] meanwhile, the Office for Budget Responsibility (OBR) has produced a figure of £1.4trn over thirty years, of which it sees the government picking up c.£350bn of the cost.[2] These are huge sums. So huge, in fact, that it triggered a response in some political quarters that the scale was too large and would also disproportionately fall onto the poorer in society if resulting in substantially higher energy prices. Climate change is seemingly too expensive to tackle, even if the number of climate change deniers continues to dwindle.
This is a prime example of a wilfully muddled argument and people knowing the price of Net Zero action while ignoring its value. Put another way, the costs of action are attacked while a blind eye is turned to the costs of inaction. £1.4trn is indeed a huge sum of money, even spread over thirty years; however, that investment brings with it the potential benefit of savings along the way, which in one assessment reach almost £1trn over the same period.[3] So, what’s really in play is a net investment of £400bn over thirty years; put in that context, the value of tackling an existential climate threat appears a bargain at the price. The Financial Times (FT),[4] meanwhile, emphasised those costs of inaction, noting that the impact of the cost of not tackling climate change might see the UK’s national debt climb to 289% of Gross Domestic Product (GDP). For comparison, the extra spending required to tackle the pandemic is projected to lift that figure to just under 110%. It’s impossible to quantify the precise knock-on impact if such a level were reached, although that’s arguably incidental to the key evidence before our eyes: focusing only on the price of action to reach Net Zero, as a means to cast doubt on its merits, is wrong. In last quarter’s review we noted a projected funding shortfall for climate change mitigation of £184m in the Greater Glasgow region alone, before we even consider the costs projected for the coastal impact, flooding from rivers, and all the other effects of climate change that would be identified as threats just within the UK's borders. Of course, those costs are only when looking within our own borders and not overseas, where the cost of inaction for those most vulnerable can be existential in nature.
Moving on to the price of something else, we look at the price of the Universal Credit uplift. That's £20 per week. At the time of writing, this uplift has just been cancelled, returning the level of benefits to those which prevailed before the pandemic hit. Put another way, the Resolution Foundation has estimated that 4.4m households will see their annual income fall by £1,000 overnight, which for 1 million of those households will mean a loss of over 10% of their income.[5] The argument for what is identified as “the biggest overnight cut to benefits in history” is that it will save £6bn and help to keep the UK’s finances on a sustainable footing. Reversing the uplift is the price for achieving that. Once again though, the value of the investment is being ignored. The value here would be in not tipping potentially millions of families into poverty; the value would be in allowing families to keep putting food on their tables; the value would be in avoiding having to decide whether to feed your family or heat your home in any given week. The latter would’ve been the case even before the recent food, fuel or energy price spikes have come about, an unwelcome turn of events that will only intensify the affordability pressures that many in society face. In short, the value is in the immense social benefit that that £20 per week has achieved. It’s also in avoiding the unseen costs that will arise over time, be they the impact on health from reducing the prospects for good nutrition or in the inevitable rise in worsening mental health. Both will bring future costs to the Government in the form of pressure on the NHS when dealing with them.
Some may argue that Universal Credit is simply being returned to its previous level and that as we begin to distance ourselves from the eye of the COVID-19 storm, that’s fair enough. I disagree. We know that the pandemic has been enormously regressive in where its effects have been felt most painfully, be that by age, gender, ethnicity or socio-economic level. We know that in the UK we have a stockpile equivalent to seven doses of vaccine per person while many people in poorer nations have yet to receive even their first,[6] despite consistent calls for vaccine equality. African vaccination coverage is estimated at just two percent.[7] An early hope, once the initial shock of the pandemic had subsided, was that society might be more reflective, tolerant and compassionate. What better way to demonstrate that then to recognise the positive impact of a more generous benefit package and retain the Universal Credit uplift? That is the kind of meaningful measure that would speak volumes.
We are investment managers of course, so where do we fit in with the above? We can no more set the budget for Net Zero than we can sanction not reversing the Universal Credit uplift. What we can do, however, is analyse what companies are doing in similar areas and seek to engage and influence their operations, both by ourselves and in collaboration with other investors. On Net Zero, as signatories to the Carbon Disclosure Project we can identify what our investee companies have committed to (or not) and engage with them to do more; on the social side, we encourage the payment of the Real Living Wage (being Accredited Living Wage employers ourselves) and in general vote and cajole according to principles of fair and equitable pay. We know that adopting such policies comes with a cost to companies but believe that the benefit justifies it. We want to invest in businesses that can demonstrate a tangible intention to improve environmental and social outcomes as widely as possible.
We see the prices of shares on our screens every day. What matters to us is the value of the companies we’re investing in.
This thematic review originally featured in the Q3 2021 IMR and was written by Simon Holman.
[1] https://www.theweek.co.uk/news/environment/953853/how-much-will-it-cost-the-uk-to-get-to-net-zero
[2] https://news.sky.com/story/the-obr-has-put-a-price-on-the-governments-net-zero-ambitions-and-it-will-make-you-shiver-12350313
[3] https://www.lse.ac.uk/granthaminstitute/news/misinformation-and-propaganda-campaign-on-net-zero/
[4] https://www.ft.com/content/ba2cdf7d-898d-4b22-b40b-8d2d80b631f8
[5] https://twitter.com/TorstenBell/status/1445496109799919631?s=20
[6] https://www.theguardian.com/society/2021/jun/05/share-vaccines-or-climate-deal-will-fail-rich-countries-are-told
[7] https://www.churchofengland.org/media-and-news/press-releases/bishops-join-calls-emergency-g7-meeting-tackle-vaccine-hoarding