Non-binding, Feel Good Agreements
Successful investing generally depends on a modicum of certainty. Consequently, non-binding agreements, often entered into as a politically driven gesture to a particular interest group, can present a dilemma for investors.
For example, consider the Paris Agreement, an agreement within the United Nations Framework Convention on Climate Change. Under the agreement, each country must determine, plan and regularly report on the contribution that it undertakes to mitigate global warning.
Unfortunately, the agreement does not provide for enforcement. The goals of the individual countries are self-determined and can be subject to changing political realities. Note that the U.S. withdrew from the agreement in 2020 and rejoined in 2021. More recently, China has put the brakes on attempts by environmental officials to reduce carbon emissions, as supporting growth takes priority over meeting climate targets.
Now, perhaps more than ever, political reliability, as a risk has become an important part of any investment strategy. Vague, non-binding agreements, are not laws. Consequently, investors will have to be careful in making decisions based on wishful thinking.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA®