Overview of the quarter
THE MARKET RALLY WHICH BEGAN LAST OCTOBER HIT THE BUFFERS IN FEBRUARY AND MARCH AS CORE INFLATION PROVED STICKY AND THE COLLAPSE OF SILICON VALLEY BANK SPARKED CONCERNS ABOUT THE WIDER FINANCIAL SYSTEM. BONDS AND GOLD ROSE IN VALUE AMIDST A FLIGHT TO SAFETY, BUT OIL WEAKENED, WITH RECESSION FEARS ECLIPSING EXPECTATIONS OF INCREASED DEMAND FROM CHINA.
The last time global inflation was this high, US athlete Edwin Moses was winning an astonishing 122 consecutive races in the 400m hurdles, taking Olympic and World golds and setting four world records between 1977 and 1987. Clearly, Moses had no trouble clearing the hurdles.
Sadly, the same cannot be said for some corporate projects designed to provide innovative solutions to climate change and other problems. Given the elevated economic uncertainty, many companies are raising their hurdle rates for such plans. Investors currently appear to prefer fossil fuel projects offering more clear-cut returns. In this report, we explain why it’s important to scrutinise hurdle rates that are based on stale or dismissive views of climate policy and the treatment of externalities.
One fossil fuel company we engaged with over the quarter was BP. We were reassured that it intends to meet oil and gas demand triggered by the war in Ukraine by extending the life of existing machinery and fields in both a resource and energy efficient way.
We also engaged on a variety of topics with a wide range of companies. These included a Swedish operator of independent schools which had encountered negative attention from politicians, a Greek cement producer seeking innovative ways to meet its long-term decarbonisation goals and a Japanese electronics conglomerate which eased our concerns about its alleged links to Uyghur detention camps in China.