Climate Risks are Growing....

We’ve had the Covid pandemic followed by the ongoing conflict in Ukraine. Both have sent shock waves around the world over the past three years and we’ve seen the cost of living crisis resulting from high energy costs and a surge in inflation combined with much higher debt. These events are a shock to the system but they come and go and the markets ride out the storms.

But something far more potentially disruptive and long-lasting persists - the climate situation. We have so far failed to get to grips with the underlying causes - mainly to phase out our reliance on fossil fuels - and as a result global temperatures are continuing to rise year after year.

Last summer, during the market downturn, I started to de-risk my portfolio. Just over one third of my investments have been sold and moved to cash in the past year. If I had anticipated the short Truss/Kwarteng fiasco I would have regarded my government bonds as risky assets and sold off some of those... it was more than disappointing to see the fallout after just seven weeks in charge. However, the climate situation continues to get worse and I don’t see any signs of this getting better in the near future.

Climate Crisis

In July, average global temperature reached 17C, the highest point for over 125,000 years whilst the world oceans were also at an all-time high and ice sheets are melting at record rates in the polar regions.

Back in 2015 at Paris, the world agreed to limit the global temperature to 1.5C and that has been the centrepiece of efforts to limit warming. But each year climate scientist have been warning that governments are not doing enough or moving quickly enough to meet this target. A senior climate scientist and former head of the IPCC, Sir Bob Watson, no longer thinks we will hit this 1.5C target and is even pesimistic about 2.0C. Based on current pledges from around the world it is estimated warming will rise to 2.7C.

July 2023, Warmest Month Ever Recorded

Even at the current level of around 1.2C above pre industrial levels, we have seen extensive heat domes this year of 50C in US and China and 45C in Spain, Italy and Greece. In addition there has been rapid ocean warming and especially the North Atlantic which was 5C above normal this year. The Gulf Stream could collapse by 2050 and even as soon as 2025 according to the latest research published in Nature. This is one of several potential tipping points that most concerns the climate scientists.

Added to all this is the rapidly disappearing Antarctic sea ice which this year is 10% lower than the previous low point. An area 10x the size of the UK is missing compared to the 1980 - 2010 average.

In the midst of all this, the G20 - responsible for 80% of global emissions - met in India but failed to reach agreement on the phase down of fossil fuels after objections from those who would have most to lose - Saudi Arabia, Russia, China and Indonesia. The G20 first pledged to phase out fossil fuel subsidies back in September 2009 but have so far failed to honour this and last year these subsidies reached a record $1.3 trillion. Clearly these most powerful global economies - China, US, India, Germany. UK, Japan etc. - understand that the continued subsidies encourage wasteful consumption, distort markets, impede investment in clean energy and undermine efforts to address the climate crisis. We lack leadership and vision at the highest levels of government.

Despite almost daily climate change alarms, there is very little analysis or understanding of the impact of the climate crisis affecting the world of finance and investments. A recent report from Carbon Tracker reveals that pension funds use of peer-reviewed economic research that predicts global warming of between 2C - 4.3C will only have a minimal impact on members portfolios and rely on economist's flawed estimates of the impact from climate change. These experts suggest that even with 5 to 7C of warming, economic growth will still continue which is clearly bonkers!

There’s a huge disconnect between what the climate science predicts from continued warming and what pensioners/investors/financial systems are prepared for. Consequently a wealth damaging ‘Minsky Moment’ is virtually inevitable.

The report is a call to action for investment professionals to look at the climate science and review investment strategies to rapidly wind down the fossil fuel system and adopt a no-regrets cautionary approach.

Also on the same lines, a report from Influence Map revealed that 95% of equity fund portfolios held by 45 of the world’s biggest asset managers are misaligned with the goal of net zero by 2050. At a time when leadership climate change is needed, most of the largest fund managers on the planet such as BlackRock, Vanguard and Fidelity are failing to meet their stated climate goals and are moving backwards.

The simple reality is...

a. global warming will continue until we get to net zero emissions, and

b. the climate impact will keep getting worse until we get to net zero, and

c. when (if) we eventually get to net zero we will continue to live in a warmer world for many generations

d. we have choices - act now or delay further.

The Earth is moving quickly into dangerous and unchartered territory and the climate scientists fear some worst-case scenarios are unfolding.

Some people are saying this is the new normal but I don’t think so...we won’t know what the new normal will be until we get to net zero.

Credit - Jonesy Cartoons

I recall the first time I heard a speech by a young Greta Thunberg at Davos in January 2019 and it’s worth repeating a short extract:

“Our house is on fire. I am here to say, our house is on fire.

We are facing a disaster of unspoken sufferings for enormous amounts of people. And now is not the time for speaking politely or focusing on what we can or cannot say. Now is the time to speak clearly.

Solving the climate crisis is the greatest and most complex challenge that Homo sapiens have ever faced. The main solution, however, is so simple that even a small child can understand it. We have to stop our emissions of greenhouse gases.

Either we do that or we don’t.

You say nothing in life is black or white. But that is a lie. A very dangerous lie. Either we prevent 1.5C of warming or we don’t. Either we avoid setting off that irreversible chain reaction beyond human control or we don’t.

Either we choose to go on as a civilisation or we don’t. That is as black or white as it gets. There are no grey areas when it comes to survival.

We all have a choice. We can create transformational action that will safeguard the living conditions for future generations. Or we can continue with our business as usual and fail”.

It seems very little has changed over the past 5 years...GHG emissions continue to rise - when I was born in the 1950s, CO2 levels were 320 ppm and today that figure has risen to 420, an increase of almost one third in the past 70 years. The consequences of inaction become more intense and we continue with business as usual.

And with each passing year, the risks to the stability of the global economy rise.

James Hansen, the US scientist who alerted the world to the greenhouse effect in the 1980s said recently:

“The world is shifting to a superheated climate not seen in the last million years and prior to human existence, because we are damned fools for not acting on the warnings over the climate crisis.”

Risk and Reward

There’s probably no greater collective risk to humanity than the current climate crisis. That’s my view but I’m sure others will have a different opinion. There are many on social media who deny there’s a problem at all so I guess for those people it’s business as usual. Of course each investor has a unique personality and each will have their own views on potential threats and invest accordingly, maybe make the odd adjustment to asset allocation to find their comfort level of risk/reward over time.

But it’s clear to me that we urgently need to move to a much more sustainable system and this will entail fundamental changes to how the global society functions. It will mean changes to our values, social structures, our political and economic systems and power relationships. I’m not confident we can achieve this in the timeframe required.

Unfortunately, the fossil fuel industry's hold over our political and financial systems continues to block and frustrate ambitious action to avert the climate crisis at every turn. Therefore, for me it's clear - the potential rewards from remaining invested are now far outweighed by the risks from the climate crisis.

Conclusion

I've just got around to watching the film 'Don't Look Up' which on the surface tells the story of two astronomers trying to warn the world about a fast approaching comet that will wipe out humanity. Of course, the impact event is an allegory for our current climate crisis and the film is a satire of government, political, celebrity and media indifference to the crisis...well worth a watch.

Leonardo DiCaprio & Jenifer Lawrence
Don't Look Up

Personally, I’ve had a good run over the past 15 years or so with an average return of around 9% p.a. but on the whole the markets have been generally good for investors. However in the past couple of years, it seems to me these conditions are changing very quickly and my biggest concern by far is the climate crisis. It’s just a question of when and what steps our global leaders will be prepared take (if any) to address the crisis in the coming few years. The worsening crisis will inevitably impact our global economies in ways it is difficult to imagine and when it does I don’t foresee any bounce-back in the markets such as we have seen time and time again with other examples of global conflict and crisis.

Vandana Shiva

So, global warming is not a minor problem that will have some minimal impact on the pensions and portfolios of future generations as the current economic literature suggests - but is an existential threat that is likely to impact existing pensioners and investors.

For me therefore the risks are becoming much higher. Of course, its impossible to know with any degree of certainty when the proverbial sh*t will hit the fan - possibly not this year or next - timing has never been my forte. But it really does feel like now is a good time to continue the walk away from these risky markets and move to the safe haven of cash.

Of course, this is very much a personal decision - I may be over-reacting as a result of climate anxiety, the politicians may see the light and implement some urgent decisions to defuse the climate crisis and the global economies and financial markets will adapt and prosper for many years to come. But I don’t think the chances of this are very high and there’s no reason for me to hang around to find out!

So, just over 10 years since the start of this blog, 630 articles posted and almost 2m pageviews, there may not be too much more to write about. I will do my usual round up and review at the end of the year to include annual returns, portfolio sales and remaining allocation. But maybe the end of the diy line is approaching.

Thanks for reading and of course, good luck to everyone going forward...I really do hope to be proved very wrong on this!

As ever, feel free to have your say on the climate crisis and what changes, if any, you will be making to your future investment plans.

SIPP Drawdown - Yr 11 Update

It's June, another 12 months have rolled by so it must be time to review my SIPP drawdown portfolio at the end of its 11th anniversary. Here’s a link to the previous update of June 2022.

The original plan when I started drawdown in 2012 was to generate a rising natural income from which I would withdraw 4% income. This was to bridge the 10 year gap between early retirement at age 55 yrs and state pension.

In 2018 my state pension kicked in - currently £10,500 p.a. after a very nice 10.1% inflation uplift in April under the triple lock provisions - so I am no longer reliant on income from my SIPP.

Portfolio Changes

My efforts to move towards a more climate-friendly portfolio are well documented and this includes my SIPP drawdown portfolio so there have been a quite few changes over the decade.

I have been reducing exposure to equities and moving to a more defensive mix in recent years and in the past 12 months this has continued. So, a disposal of my two technology trusts, individual shares in Orsted and ITM Power, my clean hydrogen ETF and my iShares global equity ETF. The proceeds have been reinvested in additions to my renewable energy trusts plus ‘steady Eddie’ Personal Assets Trust which currently accounts for over 25% of the total portfolio. The emphasis now is mainly on capital preservation.

Performance

The conflict in Ukraine over the past year or so has triggered a global food crisis, rising energy costs and high inflation and this has resulted in a lot of uncertaintainty and instability - especially around security of energy.

This war and the weaponisation of oil and gas by Putin should speed up the efforts to transition to clean renewable energy and the EU have announced their plans to end its reliance on Russia’s oil and gas and speed up its roll out of alternatives. However in the short term we have sharply rising inflation - CPI hit a 40 year high of 10% in April - also the cost of living increases from the likes of transport, food and rising energy bills. Also our borrowing has risen sharply and net debt is currently over 100% of GDP...the highest for over 60 years.

The Bank of England last week increased interest rates to 5.0% - the highest level since early 2008. The cost of borrowing is rising sharply so inevitably people will be prioritising essentials and cutting back on the goods and services they consider they can manage without. This will impact the wider economy and many sectors of the market have seen quite a pull-back these past few months. One positive is that savers are getting much better returns after more than a decade of rock-bottom savings rates.

The situation in Ukraine combined with all the ongoing fallout has naturally dominated the news but the climate crisis continues to throw up more and more challenges every week - more flooding, more heatwaves and more intense wildfires. Will we see 40C+ again this year in the UK? Unfortunately our political leaders and policy makers show little signs of acknowledging this crisis and acting decisively to address the issues. The momentum and promises made at COP 27 last year are soon forgotten.

I have had some excellent returns from some of my clean energy holdings in recent years. However in 2023 sentiment has turned negative for my renewable investment trusts and share prices have fallen back significantly as premiums have reversed and most now trade on big discounts to underlying NAVs. Consequently the SIPP portfolio has failed to make progress. My Gold ETF has held up well over the year but I was not prepared for the significant drop in my index-linked gilts ETF...down 40% following the Truss/Kwarteng fiasco last September but has since recovered a little. It really provides food for thought when government bonds start to behave like volatile small cap equities...the whole financial system appears to be more fragile than we are led to believe which has raised a red flag of warning for me going forward.

Overall, with the additional dividends from my renewable energy investments a small gain of just 1% since last June - in the current climate, not bad all things considered.

Here is the current portfolio

(click to enlarge)

Comparisons

In June 2012 when I started this series on my drawdown journey, the FTSE 100 was 5,500 and has risen to 7,460 - a gain of 35.5%. If we add in average dividends of say 3.8% each year, this gives a rough total return of 77%

In June 2012, the Vanguard LS 60 (acc) price was £105 and today stands at £215 - up 3.9% over the past 12 months and 105% since June 2012 and CAGR annualised average of 6.8% p.a.

Taking account of the income withdrawn over the earlier years of £19,400, my self-managed SIPP total return including income is showing a gain of £103,400 which is very satisfactory and works out at an average annualised return of 9.2% p.a.

The past decade has been a relatively favourable one for investors and I am sure many will have generated some good returns...I’m not so confident the coming decade will be so rewarding which is why my focus is on capital preservation rather than going for more growth. Obviously it helps that I no longer require income from my SIPP.

State Pension

I relied upon income from my SIPP to supplement my ISA income and bridge the 10 year gap between early retirement at age 55 yrs and state pension. This part of the journey became 'mission accomplished' in 2018.

My state pension has now been in payment for just over 5 years. As the SIPP is a flexi-drawdown arrangement, I can always dip in at any time for a lump sum withdrawal if required. However, I have not withdrawn any income from my SIPP over the past 5 years and it will therefore very likely remain invested. When I took a look at inheritance tax, I realised it would be more tax efficient to take money from my ISA in future as the SIPP value does not currently count towards the £325,000 tax-free allowance for IHT.

Also, unlike an annuity which, once purchased means the capital lump sum is lost forever, any residue in my SIPP will pass on to my children and grandkids...tax free if I go before the age of 75 yrs and thereafter possibly 20% or tax free depending on circumstances. For those interested here's a link on the AJ Bell site.

Obviously I am really happy with the past decade of self-managing a flexi-drawdown sipp portfolio. For the first few years, the dividend income predictably rolled in much as planned. During the next few years I withdrew significant lump sums tax free and placed the excess which I did not require for income in my ISA.

The starting sum was £62,000 so the pot has more than doubled in value over the past 11 years but, as I said last year, I am not so confident that market conditions will be so favourable over the coming decade. Maybe a little more growth but I think my main focus will be trying to maintain value in real terms after taking account of rising inflation. Hopefully the pot can be inherited by children and grandchildren at some point in the future if not needed for care home fees!

For me, the big advantage of the SIPP is the flexibility it offers. I started off with a portfolio of income-generating investment trusts. I then introduced the multi-asset, globally diverse index funds such as Vanguard Lifestrategy and now I can focus on more climate-friendly options and do my bit for the planet. It certainly feels much better to have aligned my investments with my values and lifestyle and know I am no longer investing in fossil fuels which are continuing to add to global warming and undermine efforts to tackle the climate crisis.

If you are managing your SIPP accumulation or drawdown or you are planning to do this, feel free to share your experience in the comments below.

Personal Assets Trust - Full Year Results

This 'Steady Eddie' capital preservation investment trust was added to my portfolio back in 2013...sold a couple of years later but then re-purchased in 2020 as I was re-evaluating asset allocation following the Covid-19 shock to global markets.

It’s policy is to protect and increase the value of shareholders funds over the long term and the manager Seb Troy and his team aim to achieve this with a mix of diverse assets including global equities, government bonds, gold and cash.

Troy are committed to maintaining high standards of responsible investment and since 2019 have been members of several climate change associations including The Institutional Investor Group on Climate and Climate Action 100+.

In the past, I have also held Capital Gearing Trust but as it has a significant holding in fossil fuels, it is currently excluded from consideration. 

Results

The trust has this week published results for the full year to end April 2023 (link via Investegate)

Over the past year, net assets have fallen by -0.9% (total return) compared to 6.0% for the FTSE All Share index. Over the past 5 years the returns were 32.4% and 24.2% respectively. The trust's share price is maintained close to NAV and the price has decreased by 22p (-3.0%) to 481p since last April.

Commenting on the results, investment manager Seb Lyon said:

"The past two years have seen us exit a hall of mirrors. We are now emerging from a prolonged period of distortion, born of zero (and even negative) interest rates, combined with quantitative easing. Economies and financial markets are slowly absorbing the effects of much tighter monetary conditions. While the dominos have been falling since early 2021, with the peaking-out of cryptocurrencies and retail investor speculation, the process of unwinding excess will take time and requires patience. The consequences are the unravelling of the 'Everything Bubble', which has inflated all assets and is likely to end with prices falling back down to earth. Despite the market declines in 2022 in equities and bonds, valuations remain high as investors are anchored on multiples of the last decade.

We are no longer in a buy-and-hold market, in which valuations expand as lower yields support higher prices. We expect that inflation has become embedded. This is the product of several factors, but of particular importance is the increased bargaining power of labour in the aftermath of the pandemic. Wage inflation is the most important component in driving higher prices on a more sustained basis. This is coinciding with slowing globalisation and increased intervention from governments, often in pursuit of more nationalist agendas. These factors are inflationary, and they come at a time when central banks have less room to manoeuvre. We expect that interest rates can only rise so far without severely injuring indebted economies. This unfamiliar backdrop has called time on a 40-year bull market in bonds, with all the implications that brings for investors".

He concluded...

"As it stands, index-linked bonds are pricing in a world where interest rates remain higher than they have been in over a decade, but where inflation returns to the Federal Reserve's 2% target. In such a world, real growth needs to be structurally stronger than it has been. For the reasons alluded to in this report, namely the continued indebtedness of Western economies and the recent rise in the cost of capital, we do not believe this to be consistent with the likely reality.

In light of all of this, investors are talking bearishly. But they are acting bullishly. It will take time for positioning to shift from the benign environment of the past decade. Investor focus seems to be on coincident indicators as opposed to looking forward to the effects of higher interest rates and tighter lending conditions. These are likely to lead to a recession. Bond markets, often a more reliable and rational indicator than more emotional and volatile stock markets, are indicating the most inverted yield curve since 1981. The lower yields in longer duration bonds are a clear warning of a hard landing. This is currently being ignored. Ayrton Senna said, "You cannot overtake 15 cars when it's sunny…but you can when it's raining". We know the companies we want to own should attractive valuation opportunities present themselves and we are ready to increase our equity exposure, from currently prudent levels, as conditions become more treacherous".

The trust has paid a small dividend of £5.60 p.a. (paid quarterly) for several years and will pay a special additional dividend of 2.1p this year to reflect the higher than usual income from US TIPS .

Ongoing charges are 0.65%.

Holdings

At the end of the period, asset allocation remained defensive with liquidity at 76% (cash, gold and bonds etc.). Currently equities make up just 22% - down from 38% last year and the lowest allocation since 2008. Meanwhile the allocation to ‘liquidity’ comes from short-dated US and UK government bonds that are starting to deliver respectable nominal returns for the portfolio.

Top equity holdings include Unilever (3.7%), Nestle (3.0%), Visa (2.8%), Diageo (2.4%), Microsoft (1.8%) and Google (1.5%). US index linked bonds make up 35% with cash and UK treasuries a further 21%. Gold Bullion accounts for around 9.2% of the portfolio.

The shares were re-purchased for my portfolio at 432p (adjusted for 100:1 share split) and have advanced to currently 472p.

PNL 3 Yr share price/NAV

The decision by Putin to send troops into Ukraine in 2022 has created huge global uncertainties. With rising debt levels, global energy price increases, food and inflation on the rise, and also the significant threats posed by climate change, I think in these uncertain times it's probably a sensible idea to think about the potential downside of the markets and with an eye on capital preservation. 

The shares are held in both my SIPP and ISA and make up around 9% of my portfolio. 

As ever, this article is merely a record of my personal investment decisions and should not be regarded as an endorsement or recommendation - always DYOR!

Thrive Renewables - Full Year Results

In 2018 I started to transition to a more climate-friendly portfolio to bring my investments more closely in line with my values and lifestyle. So, last year I decided to take up a stake in a new share offer from Thrive Renewables (previously Triodos Renewables). The crowdfunding raised a total of £6.8m and saw 900 new shareholders join the Thrive community. The shares account for around 5% of my green portfolio.

This is an unlisted company so the shares in Thrive are not as easily traded as shares listed on the stock exchange with a low cost broker such as AJ Bell Youinvest for example. Instead, once purchased, any subsequent share sales are facilitated via a monthly share auction.

About

Thrive has been going since 1994 and is all about connecting ordinary people and sustainable renewable energy opportunities. They now have around 7,000 investors - individuals, businesses and organisations - and have established 31 projects throughout the UK including solar PV, battery storage, geothermal, hydro and wind. The combined capacity has generated over 2 million MWh of clean electricity over the past 25 years.

Thrive is certified B Corporation from 2020 with a score of 110.8 - the highest scoring renewable energy company in the UK. They currently rank in the top 5% of all global B Corps. Thrive are committed to reaching net zero carbon emissions by 2030 and have already achieved zero with scope 1 & 2 emissions.

Results

The company have recently released results for the full year to December 2022 (link to pdf via Company website).

Turnover increased by 59% to 17.5m which resulted in gross operating profits of £6.7m compared to just £2.5m in 2021.

Clean energy capacity increased by 6MW with a further 25MW under construction. The portfolio generated a total of 133,858 MWh of clean electricity over the year - enough to power 38,000 homes or the equivalent of a town the size of Halifax.

“2022 has been a challenging year for many, with energy bills soaring as a result of the UK’s dependence on gas. Our response is to continue getting new renewable capacity built. This includes community-based projects such as England’s largest onshore wind turbine, as well as funding new rooftop solar arrays that help UK businesses to decarbonise and constructing a 20 MW battery storage project that will offer vital flexibility services to the grid. We've allocated a total of £11.4 million to developing more projects - all of which will help with decarbonising the UK’s electricity system so that people can benefit from cheaper, cleaner power in future.” – Matthew Clayton, Managing Director, Thrive Renewables

Power Prices

Most of Thrive’s income comes from the sale of renewable electricity. The wholesale market has been very volatile in recent years. For the 5 years to April 2021, the average price was £46/MWh but by August 2022 the price had risen to £370/MWh...an 8-fold increase.

Thrive manages its exposure to this volatility by maintaining a variety of long-term power purchase arrangements (PPA) and fixing the price for up to two years in advance. So already in May 2023 the majority of prices have been agreed for the whole of this year and beyond.

Around 37% of current generation benefits from government legacy 20 year support under the Feed in Tariffs and ROCs but more recent and future projects will obtain revenues from a range of power and grid servicing arrangements. These include selling power directly to the market via PPAs, selling power directly to industry via a private direct wire, entering into arrangements for government backed Contracts for Difference and, in the case of battery storage projects, providing grid servicing and balancing to take advantage of periods of high demand.

Community-Owned Onshore Wind Turbine

Projects over the year included England’s largest community-owned wind turbine supporting Ambition Community Energy in Bristol and the construction of a 20MW Feeder Rd battery storage site. They also secured government funding of £91m towards a new ground-breaking geothermal energy site in Cornwall. This will involve drilling down 17,000 ft to extract the heat from the granite rocks which should provide heating and hot water for 3,800 homes in the Redruth area.

This was a record-breaking year for wind across the UK and combined with higher energy prices, the board are increasing the annual dividend by 70% from 7p to 12p. This represents a yield of 5.1% on the price of 235p I paid for the shares last September.

Conclusion

Each year we see more and more evidence of the devastating impacts from the climate crisis all around the world. The latest warning from the World Met. Org. confirms something that has been apparent for some time - a probability that we will breach the key 1.5C global limit by 2027! Just last week N. Italy experienced its worst flooding for 100 years with 6 months of rainfall in a single day.

We need to decisively commit to end our reliance on fossil fuels and transition quickly to a more sustainable system based on a range of renewable energy solutions combined with measures to insulate our homes and factories to conserve energy.

United Downs Geothermal Project

Obviously an investment in Thrive Renewables will only have a small impact on the climate crisis. But it is rewarding to know that your investment is making a positive difference and helping to build the clean energy projects that will move us towards net zero emissions. The more people that support these sustainable solutions, the quicker we can transition to a less threatening world. 

Business as usual and continuing to rely on fossil fuels is no longer an option. Never before has it been so important to accelerate home-grown renewables and reduce our dependence on expensive, climate destroying fossil fuels.

As ever, this article is merely a record of my personal investment decisions and should not be regarded as an endorsement or recommendation - always DYOR!