Scottish Mortgage Trust Report and Shell Climate Change Votes

The Scottish Mortgage Investment Trust (SMT) recently published their Annual Report and it’s well worth reading bearing in mind the exceptional performance they achieved last year. NAV total return was up 111% and that was way ahead of the global sector average. It was the best ever performance of the trust since it was founded in 1909 and it’s now one of the largest investment trusts.

How did they achieve such a remarkable result? You might think it was because of a strong focus on technology stocks – but that is only 23% of their portfolio. Perhaps you think it was because they made big bets on a few well-known names such as Tencent, Illumina, Amazon and Tesla? But that is not the case.

It is true that Amazon represented 9.3% of the portfolio at the start of the year and Tesla 8.6% but the 30 largest holdings only represented 80% of the portfolio. In other words, it was in essence a large and diversified portfolio. But a few stocks made a large contribution to overall performance with Tesla contributing 36% despite the trust selling 80% of their holding during the year so as to maintain diversification.

In his closing words, fund manager James Anderson suggests that he should have been more adventurous. He says “we have to be willing to embrace unreasonable propositions and unreasonable people in order to make extraordinary findings….”. He discounts the value of near-term price/earnings ratios – understanding how the world is changing seems to be his main focus.

Another share that many private investors hold is oil company Shell (RDSB) who recently held their Annual General Meeting. If you don’t hold it directly you might hold it indirectly as it’s usually a big holding in global generalist funds and trusts.

There were two resolutions on the agenda related to climate change one by the company asking for support for their “Energy transition strategy” and one requisition from campaign group Follow This. The latter demanded more specific targets to achieve reduction in long-term greenhouse gas emissions. The company’s resolution received 89% votes FOR, but the latter achieved 30% FOR. Even so that was higher than previous votes, or similar resolutions at other oil companies with support from proxy advisory services and big institutions.

Even the company’s resolution, supported by a 36-page document and which was only “advisory” includes reference to Scope 3 emissions (i.e. those emitted by their customers using their products). They say “That means offering them the low-carbon products and services they need such as renewable electricity, biofuels, hydrogen, carbon capture and storage and nature-based offsets”.

Are these proposals likely to be effective or substantially contribute to climate change? I think not when China and other countries continue to build coal-fired power stations and many people question whether it’s possible to change the climate by restricting CO2 emissions. These resolutions look like virtue signalling by major investors and may be financially damaging to Shell. It is particularly unreasonable to expect Shell’s customers to swap to other energy sources – they may simply switch to other suppliers if they can’t buy them from Shell. As the Shell report says: “If we moved too far ahead of society, it is likely that we would be making products that our customers are unable or unwilling to buy”.

Shell says that “Eventually, low-carbon products will replace the higher carbon products that we sell today”, but their report is remarkably short on the financial impact. In fact their report reads more like a PR document than a business plan and it also makes clear that projecting 30 years ahead is downright impossible with any accuracy.

Note: I hold Scottish Mortgage but not Shell. I do not hold any oil companies partly because they are exploiting a limited resource making exploration and production costs more expensive as time passes and partly because I see a witch-hunt by the environmental lobbyists against such businesses. I also dislike companies dependent on the price of commodities and vulnerable to Government regulation which Shell certainly is on both counts.

One interesting question is who owns and runs the Follow This campaign and how is it financed? Their web site is remarkably opaque on those questions. Even if they have been remarkably effective in getting media coverage for their activities, I would want a lot more information on them before supporting the resolutions they advocate.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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