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Investing in climate change solutions hits the mainstream

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Investing in climate change solutions hits the mainstream 1
Louise Ward, Investor Relations Director at renewable energy investment company

Louise Ward, Investor Relations Director at renewable energy investment company

Louise Ward, Investor Relations Director at renewable energy investment company, Low Carbon shares her thoughts on why the finance community should aim for more responsible investments in order to create a low carbon future, and for impressive returns.

As the increasingly popular divestment ‘movement’ continues to gather pace, as well as global attention, investors today need to both look ahead for opportunities for growth, and anticipate the solid returns that come from divesting stocks and equity from the fossil fuel industry and reinvesting into climate solutions such as solar PV and onshore wind. This is even more poignant following the deal made at the Paris Climate Conference (COP21) in December last year, which commits governments to holding the increase in the global average temperature to well below 2 degrees above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5 degrees above pre-industrial-levels.

Education is key

A flick through the papers will clearly tell you that divestment is a hot topic that is generating widespread, global, attention. Furthermore, the movement has public backing from high-profile and high net-worth individuals, institutions and political entities such as universities, the Norwegian government and The Rockefeller Foundation. Such an overwhelming level of endorsement and positivity around divestment is hard to ignore, and should not be underestimated as a viable and effective weapon in the global fight against climate change.

This is not just a case of ‘tree-hugging’ – divesting a reinndvesting into climate change solutions can also bring with it tangible financial returns.The government and the energy and investment industries need to do more to educate institutional investors as to the substantial and low-risk returns that can be achieved from climate solution projects such as solar photovoltaic (PV) and onshore wind. Overall, this is a question of raising awareness around these alternative investments,which can both improve the UK’s energy mix as a whole and significantly reduce carbon emissions. If we want to move to a low-carbon economy, it’s evident that we need to invest more heavily into low-carbon assets.

Reliable technologies generate reliable returns

There’s no two ways about it – renewable energy technologies have a strong proven track record that’s crucial to delivering impressive returns and high levels of confidence for the savvy investor. For instance, solar PV panels have been actively generating electricity for at least twenty years, and the scale of solar PV projects and investment in them has increased dramatically during that time – most notably in the past three years where capacity has more than tripled[i]. The result of this increase in confidence can be seen through steps that corporate giants such as Apple and Facebook have taken recently, pledging that they will be investing in solar PV to power their data centres and offices. Onshore wind power is another example of a renewable energy technology in its twentieth year, was described by the Department of Energy and Climate Change (DECC) as ‘the leading individual technology for the generation of electricity from renewable sources during 2014’.[ii] The myth that climate solution technology is too ‘new’ or ‘unproven’ is just that- a myth- and the statistics are there for all to see.

Over the last few months, we have been seeing a dramatic drop in the price of oil, which has only highlighted its volatility. Climate solutions, on the other hand present a strong contrast to this predicament, as they are not volatile to the same extent and their marginal cost of energy production is zero. No other power generation plant (oil or gas) can say the same. And even if investors don’t actually believe in climate change, these investments in climate solutions stand up on their own financially. They are generally long-term, inflation-linked contracts which generate attractive and solid returns.

The majority of climate solution projects are, essentially, infrastructure projects. In fact, the words ‘green’ or ‘renewable’ don’t often have to be mentioned at all, which can be the difference in convincing reluctant investors of their viability as reliable investments. In truth, 40% of electricity demand has been met by renewable energy generation in recent years[iii], which indicate that these technologies are a core, resilient electricity source that are here for the long-term.

The new wave of investors

A recent report – “Investing in a time of Climate Change” –which was commissioned by global investment consultancy firm, Mercer, states that we need institutional investors to take the on role of a ‘climate aware future makers’. This group consists of pioneering investors who understand how climate change is going to affect our world, and who can lead the way in showing more risk-averse investors on how to invest in climate solutions. Future makers realise that our FTSE 100 will not always be dominated by fossil fuel giants such as BP and Shell, and that renewable energy companies will soon make their way into the mainstream market, and stay there. Lastly, a climate aware future maker will seek toapply the use of their personal, individual investments to his/her business life as well. They will see that if they are making such impressive returns from the solar PV installed on their household roof, for example, then there is a huge potential to make money from investing in solar PV projects at scale, in the business world.

A big drawback is that there is currently no legislation here in the UK that is actually motivating investors into investing in climate solutions. In neighbouring France, however, things are changing. The French government is now calling on institutional investors to both disclose and measure the carbon intensity of their investment portfolio, and similar measures are also being taken informally in parts of Scandinavia.  I hope to see this call to action and level of engagement imitated by governments in the UK throughout the whole of Europe. If this happens, it will ultimately create a more mainstream and positive climate solution investment environment for future generations, and will assist in initiating more climate aware future makers for the task ahead.

Divestment: a new era

It’s clear that divesting from fossil fuels and reinvesting into climate solutions has its obvious benefits, as ultimately this can help combat the negative effects of climate change whilst generating attractive, stable returns for the most innovative and forward-thinking of institutional investors. These technologies are not a ‘gimmick’ that will pass. Investing in climate solutions presents strong growth opportunities for both now and for future generations. We have some of the sharpest financial brains in the world, right here in the UK, so no ‘problem’ is too large, or should be overlooked because it’s not the status quo. Additionally, global governments have promised to take action following the negotiations at COP21, and so the UK cannot and should not be seen to fall behind on this, but should lead the way for the entire world.Ultimately, we hope to see more investors and financial institutions leading the way in educating the industry on the true benefits of climate solution investment, in the dawn of the era of divestment.

*Previously published in Issue 3

[i]https://www.gov.uk/government/statistics/solar-photovoltaics-deployment

[ii]http://blueandgreentomorrow.com/2015/07/31/official-figures-reveal-energy-ministers-error-over-onshore-wind/

[iii]http://www.carboncommentary.com/blog/2015/6/7/new-record-for-uk-renewables-output

Investing

An outlook on equities and bonds

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An outlook on equities and bonds 2

By Rupert Thompson, Chief Investment Officer at Kingswood

The equity market rally paused last week with global equities little changed in local currency terms. Even so, this still leaves markets up a hefty 10% so far this month with UK equities gaining as much as 14%.

The November rally started with the US election results but gathered momentum with the recent very encouraging vaccine news. This continued today with the AstraZeneca/Oxford vaccine proving to be up to 90% effective in preventing Covid infections. This is slightly below the 95% efficacy of the Pfizer and Moderna vaccines already reported but this one has the advantage of not needing to be stored at ultra-cold temperatures. One or more of these vaccines now looks very likely to start being rolled out within a few weeks.

Of course, these vaccines will do little to halt the current surge in infections. Cases may now be starting to moderate in the UK and some countries in Europe but the trend remains sharply upwards in the US. The damage lockdowns are doing to the recovery was highlighted today with the news that business confidence in the UK and Europe fell back into recessionary territory in November.

Markets, however, are likely to continue to look through this weakness to the prospect of a strong global recovery next year. While equities may have little additional upside near term, they should see further significant gains next year. Their current high valuations should be supported by the very low level of interest rates, leaving a rebound in earnings to drive markets higher.

Prospective returns over the coming year look markedly higher for equities than for bonds, where return prospects are very limited. As for the downside risks for equities, they appear much reduced with the recent vaccine news and central banks making it clear they are still intent on doing all they can to support growth.

Both factors mean we have taken the decision to increase our equity exposure. While our portfolios already have significant allocations to equities and have benefited from the rally in recent months, we are now moving our allocations into line with the levels we would expect to hold over the long term.

Our new equity allocations will be focused on the ‘value’ areas of the market. The last few weeks have seen a significant rotation out of expensive high ‘growth’ sectors such as technology into cheaper and more cyclical areas such as financials, materials and industrials. Similarly, countries and regions, such as the UK which look particularly cheap, have fared well just recently.

We think this rotation has further to run and will be adding to our UK exposure. This does not mean we have suddenly become converts to Boris’s rose-tinted post-Brexit view of the UK’s economic prospects. Instead, this more favourable backdrop for cheap markets is likely to favour the UK.

We will also be adding to US equities. Again, this does not represent a change in our longstanding caution on the US market overall due to its high valuation. Rather, we will be investing in the cheaper areas of the US which have significant catch-up potential.

We are also making a change to our Asia ex Japan equity holdings. We will be focusing some of this exposure on China which we believe deserves a specific allocation due to the strong performance of late of that economy and the sheer size of the Chinese equity market.

On the fixed income side, we will be reducing our allocation to short maturity high quality UK corporate bonds, where return prospects look particularly limited. We are also taking the opportunity to add an allocation to inflation-linked bonds in our lower risk, fixed income heavy, portfolios. These have little protection against a rise in inflation unlike our higher risk portfolios, which are protected through their equity holdings.

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Optimising tax reclaim through tech: What wealth managers need to know in trying times

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Optimising tax reclaim through tech: What wealth managers need to know in trying times 3

By Christophe Lapaire, Head Advanced Tax Services, Swiss Stock Exchange

This has been a year of trials: first, a global pandemic and, now, many countries facing the very real possibility of a recession. For investors, private banks, and wealth managers, these tumultuous times have manifested largely in asset price volatility, ultra-low interest rates and uncertainty about when things may level out, as well as questions about what can be done to safeguard portfolio performance.

The answer here lies within identifying and creating efficiencies to maximise performance and minimise cost, and while there is a slew of options as to how to do this, they are often siloed or have a single USP. Tax optimisation, on the other hand, provides benefits to all, not just in increasing returns for investors, but also in creating economies of scale across stakeholders, creating millions – if not billions – in savings for banks.

Evolving tax reclaim

The tax reclaim process used to be a tedious one banks had to manage themselves, and required detailed, industry and country-specific knowledge to stay on top of constantly shifting requirements and regulations. And when we consider that many countries – such as the UK – allow for capital gains exemptions, tax optimisation may not seem like an integral part of the process. However, this isn’t the case for all countries, and can lead to severe after-tax implications on global portfolios.

Furthermore, even if you’re able to avoid double taxation, getting the money back is not always as simple as it sounds. This, combined with the fact that countries often have contradictory taxation rules or requirements, makes navigating the tax reclaim space a challenge even for those with the right expertise and experience.

Ultimately, providing tax optimisation to investors ends up being a heavy lift for private banks and wealth managers, who often don’t have the right solutions, are relying on outdated technology and manual processes. While this is generally fine for business, it is no longer fit for the purpose when it comes to tax optimisation. To date, knowledge and expertise have been the key to protecting and maintaining profitable investments and avoiding tax leakage. However, through tax optimisation services starting to emerge, portfolio managers can now manage and reinvest easily.

Today, technology has evolved the process so that banks are able to access and submit tax reclaim – and the relevant documentation – online, leaving the tech provider to coordinate next steps with custodians and tax authorities behind the scenes. In essence, taking the legwork out of the process while assuring consistency and completeness in execution.

Simplifying tax through tech

While tax optimisation may seem like an easy choice in theory, it is not always the go-to for every private bank or wealth manager. Without the right supports and setup, including innovative technologies and automation, tax reporting must be done manually, leading to labour intensive processes and huge time wastage. Changing these processes can be overwhelming for those used to a certain way of operating.

By making tax reclaim digital, banks will be more able to optimise returns and gain efficiencies while reducing redundancies and unnecessary complexities. Cloud based solutions or platforms can offer a safe and secure solution for banks, wealth managers, and investors to access and submit any information required, processing the data automatically for conformity and completeness.

It is critical that providers who intend to offer tax services are able to do so efficiently with the right software and data processing capabilities. Not only does this drive continuity in service and efficiencies in process, but it is the only sustainable way to handle such a complex landscape sustainably without wasting time or money.

End-to-end, technologically driven tax services offer a huge number of advantages to private banks and wealth managers, the most important of which is the ability to provide continuity through tumultuous times. As we move through the end of 2020 into 2021 this will only be increasingly important as banks, managers and investors look to provide new services to clients and strengthen existing relationships in a difficult market.

As investors seek to find returns amid the global economic downturn, the demand for innovative solutions will only increase. Technology like cloud-based software, AI, and data optimisation can all serve to improve not just the tax reclaim processes, but the overall client experience within capital markets.  Private banks and wealth managers are suitably equipped to provide these innovative solutions, but those who do not prepare themselves effectively and keep ahead of trends will run the risk of losing current and new clients to someone who can offer more for less.

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Equity Sharing – How do you choose the right plan for you?

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Equity Sharing – How do you choose the right plan for you? 4

By Ifty Nasir, co-founder and CEO of Vestd, the share scheme platform

In a survey of 500 SMEs, nearly half told us that the pandemic had made them re-evaluate how they operate. That’s not surprising as they’ve been faced with some unique challenges this year. Government support during the early stages of the pandemic, is now being extended till March 2021 but many businesses continue to struggle.

Making good people redundant improves cashflow in the short term but will have a long-term damaging impact on the business. At the same time, motivating employees, who are working remotely and worried for their jobs, is not easy.  It’s therefore not surprising that equity sharing, in the form of ‘share’ and ‘option’ schemes has become even more popular, with one in four SMEs now sharing equity with their employees and wider team

However, sharing equity can be a complex area and is easy to get it wrong. When it goes wrong there is a danger that you create tax issues (for you and your employees), de-motivate your team and even create future funding issues for the company. It is therefore really important that you choose the right scheme to set-up, but make sure you manage it too.

Below is a brief summary of the main schemes used by Start-ups and SMEs in the UK today. There are similar schemes and considerations globally.

  1. EMI Option Schemes – This is the most tax efficient scheme. Recipients pay just 10% Capital Gains Tax (CGT) on any value growth. The employer can also offset both the cost of the scheme and the value growth achieved by employees against its Corporation Tax  liability. You can also set conditions to control the release of equity, such as time served or performance. The recipient can’t simply walk away with shares, having delivered no value (which is one of the top concerns of many of the businesses and founders we talk to).  EMI Option Schemes are used by 41% of SMEs (who share equity) and, for good reason, are the most popular. Read our full guide to EMI for more information.
  2. Ordinary Shares  – This is the issuance of  full ordinary shares in the business, often without conditionality and with immediate effect. They are most often issued against cash investment. Once an employee (or any other recipient) has ordinary shares, you have no control over what happens to the shares thereafter. The individual can simply walk away with the shares, so we don’t normally recommend them for contribution that’s yet to be delivered. They’re also not tax efficient, as the recipient will have to pay tax at their marginal Income Tax (IT) rate, on any value the shares have at that point. These are used by 31% of SMEs.
  3. Growth Schemes  – These are a good option when the founders have built value into their company. The recipient only shares in the capital growth of the business from the date that the shares are issued.  You can give growth shares to anyone (not just employees) and you can attach additional conditions. These shares limit the risk of the recipient having to pay income tax on receipt of the equity, as they do not hold any value when they are issued but do pay CGT on the value growth at sale. Growth schemes are used by 31% of SMEs. Read the full details on Growth Shares here.
  4. Share Incentive Plan – SIP –  This is a tax efficient plan for all employees that gives companies the flexibility to tailor the plan to meet their needs.  Share Incentive Plans are used by 23% of SMEs.
  5. Unapproved Options – These are not very tax efficient as the recipient will pay IT on any value inherent in the share, above the exercise price, when they exercise the option. That said, they do provide more flexibility than the other options and are the easiest to set up as you don’t need HMRC approval. Unapproved Options are used by 22% of SMEs.

Is it worth the hassle? Earlier this year (i.e. during the first lockdown ) we carried out a piece of research with  business leaders,  exploring their attitude towards sharing equity with employees and wider team.  We spoke to over 500 owners of SMEs and identified six main business benefits to doing so:

  • Recruitment. You can combine salary with equity, to create compensation packages that match, or improve on, offers made by other more established companies with deeper pockets.
  • Retain the best talent. Share schemes are proven to increase employee retention and can help you reduce if not avoid hiring costs.
  • Increase productivity and performance. Studies have shown that employees who are also shareholders are more committed to their work and contribution because they feel directly vested in the growth in value of ‘their’ company.
  • Improve employee engagement and happiness. The more all employees feel included in the mission, direction, and success of the business, the more they’re motivated to contribute to the company.
  • Relieve cashflow pressure. Equity can be used to reduce the need for finance. Instead of paying people top rates and large bonuses, you can incentivise them via shares or options…giving them a share of the future they are helping to create.

Recruitment and retention are clearly the key drivers. It’s not too surprising to see why. Companies succeed or fail largely due to the quality of the people they manage to attract and retain. However, for smaller and start-up employers, attracting the right people can be difficult.  Good people are typically attracted to the idea of working for a house-hold name brand, they look for job security and are enticed by comprehensive employee benefit packages and high salaries that are unaffordable by most smaller companies. Employee share schemes are an effective way for smaller companies to compete in the job market against larger companies, with that potential for a massive/significant upside.

However, at this challenging time, it’s not all about money, keeping people focussed and motivated during the pandemic is at the top of most employers’ worry list.  If you choose the right scheme, equity sharing encourages employees to align their motivations to that of the long-term success of the business, over the immediate or short-term gains. And, right now, that is perhaps worth more than anything.

If you’d like to get into the detail then check out our guide to employee share schemes.

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