It’s an ongoing debate in investment, to divest or not to divest. There are advocates for both, but what’s often not considered, is whether it’s a binary decision at all? Should one be at the detriment to the other, and should they be mutually exclusive? It’s a question we’re often asked.
We live in a world of boundaries, artificial and Nature made. Arguably, we’ve respected the human-made boundaries more than we have the Nature informed ones – border controls as an example. However, it’s the planetary boundaries, the laws that Nature sets, and the thresholds beyond which we destabilise our life support system, that really matter. Once destabilised they unleash a cascade of crises that crash into the artificial boundaries. An example of this is climate change and the expected mass migration of communities impacted by increasing extreme weather which leads to both social and economic destabilisation. With this in mind, planetary boundaries, and the need to stay behind thresholds, becomes the investment imperative of our time.
This leads to two important questions. Where are the problems? What are the solutions? And it’s here investors play a significant role. Providing the impetus (in this case capital) to tackle the problem and further deploy the solution. It isn’t an and/or, it’s both. We live in a world where we must imagine and deploy new solutions, as much as re-engineer existing technologies and businesses that have become the problem, in order to become part of the solution.
Investing in the solutions, in some ways, is the easy part. Using science as our guide we can navigate a variety of opportunities for the issues we face, and identify the most practical and cost-effective solutions to drive change at scale and pace. A wonderful example of this is Michael Liebreich's Clean Hydrogen Ladder 1 (which we wrote about in an earlier opinion piece on Hydrogen) that orders use cases for clean hydrogen according to merit. However, investors still need to be mindful of the ESG and marketplace related issues that can arise in even the most future-focused and future-fit companies. Driving investment into the solutions increases the market share of these new technologies and starts to drive outcome measures that enable us to track progress against the need for threshold management and delivery. Let’s refer to this as solutions-based investing.
So, that’s what everyone should be doing, right? Investing in the solutions? Put simply, yes. But the solutions aren’t yet at a scale to cater for the role that the previous technologies and businesses have delivered. There’s a gap to consider, skills to benefit from, livelihoods that depend on the old system, and infrastructure that needs to be mindfully retired and/or upgraded for new roles and new systems. With that in mind, transition becomes the narrative. Capital needs to be made available to support those businesses with legitimate roles to play in contributing to the new economy. That contribution will always depend on operational and marketplace pivots. This is where the role of transition finance comes in.
Moving away from the, often heated, conversations that can surround the divestment movement, we find contextualising the needs of society into solutions-based and transition-based finance more constructive. The dominant narrative in divestment is whether divesting drives up the cost of capital for investors, and, therefore, does it work. It’s undecided 2 . Whilst it’s clear that the cost of capital for fossil fuel companies has increased over recent years, it’s not clear whether this is down to divestment or whether new information regarding climate risk is informing investment decisions and driving this cost up. Either way, increasing pressure on those companies that need to transition is a welcome part of the transition finance toolkit. Transition finance recognises the need for adaptation and evolution, setting out a framework that enables both to happen, with clear intentions. Therefore, milestones and deliverables can be set. For example, investing in solutions will be driven by the need to ensure solutions are being deployed and displacing services that the old solution may have historically provided. Market share growth is a good indicator of the competitive pressure the new solution is placing on the old solution. How much of the company is geared towards solutions is another good example of how intentional and committed the company has been, is, and will hopefully be, in the future.
Meanwhile, investing in transition-based companies comes with a need for timetables and milestones to be set on agreed transition metrics (for example, the shifting revenue and research and development expenditures associated with black energy versus green energy in an energy company). The Transition Pathway Initiative 3 is an example of a global movement, facilitating transition across multiple sectors. Engagement here, and the relationship between the management of the company and the investor, become critical components of the transition pathway set for these types of investments. Transition requires collaboration and finance to be mobilised alongside that engagement to drive the change required. If this is achievable, then transition finance has a vital role to play. Investors working via third-party fund managers must appreciate this, and work to ensure timetables and milestones are being set and engagement is regular and intentional.
At Tribe, we believe in the power of both. We believe our role, however, as a smaller impact focused wealth manager, is to invest in and drive the growth of the solutions – in line with our clients’ values and desired outcomes. Our influence can be more significant there, given who we are and how we operate. We understand what we bring, and how best to leverage it for maximum impact. In other words, we know where we add value and we’re committed to adding that value. We encourage all wealth managers, asset managers and investment managers to understand their footprints, influence and abilities to bring about change and to commit to adding that value in the spaces that make sense for them. We don’t live in a binary world. We live in a complex, non-linear, multi-faceted world that requires us all to understand where we add value and where we detract value and to address both with equal conviction and commitment. Solutions and transitions are part of the same story.