The path to climate neutrality is difficult. The Corona pandemic and Ukraine war, as well as high inflation, have made this road even rockier. What does this mean for investors and how does it affect ESG portfolios?
Climate change must be fought. That's clear to most. «However, a targeted and thus successful transition to a more sustainable global economy is by no means guaranteed, as the uncoordinated reactions of governments to the energy price spikes last year showed», explain Monica Defend, Head of Amundi Institute, Vincent Mortier, Group CIO and Matteo Germano, Deputy Group CIO at Amundi, in the current publication «Capital Market Assumptions 2023.» The French asset manager is one of the ten largest asset managers in the world. The experts add that although the common goal has been defined, there will always be events that have a profound impact on the real economy and the financial markets. And they warn: «There is a risk of a 'disorderly' transition due to uncoordinated policy measures.»
Energy turnaround could lead to inflation boosts in the short term
Experts fear that the energy transition could lead to inflationary boosts in the short term due to higher CO2 and raw material prices. However, the price pressure will not last. In contrast, they see more long-term effects in the move away from fossil fuels, in technological developments and in initially lower productivity. This would dampen domestic demand and inhibit economic growth in the medium to long term.
Dealing with social costs will be very important for the transition
Central banks would try to counter inflationary fluctuations and prevent explosive debt, while keeping long-term interest rates under control. In doing so, the sectors most closely associated with the green transition would benefit most from policy support - a kind of «green quantitative easing», the experts added. Investing carbon tax revenues in climate-related activities that would help households and businesses could also offset some of the negative effects of the transition on growth, they said. This could lead to higher productivity while helping to reduce social costs and reduce resentment among the population, they added.
«Dealing with social costs will be very important for the transition, as the effects of climate change are felt unevenly across the population», they suggest. And they continue, «A more inclusive growth model could be promoted by redistributing financial resources in favor of labor without significantly affecting the economy. Higher wages would reduce corporate profit margins, but higher disposable incomes boost household consumption, in turn supporting corporate sales.»
Climate protection drivers belong in the depot
The investment experts continue to advise keeping an eye on developments towards climate neutrality. New political measures, technologies and changing consumer preferences will certainly determine the coming years: «Climate change harbors both risks and opportunities for investors, and topics relating to the energy transition will certainly remain in focus.»
Stock returns likely to trend lower
In terms of equity returns, the experts expect a decline over the next ten years compared with the past decade: «Emerging markets, especially Chinese and Indian equities, could offer interesting opportunities, while the U.S. remains the most important among mature markets. From a sector perspective, green change leaders are favored along with information technology. We are positive about the outlook for value investing.»
Bonds are making a comeback
Bonds should return to their long-term trend after many difficult years and take on an important role as risk diversifiers in portfolios, according to the experts: «However, higher volatility must be expected in view of greater uncertainty and a weaker economic outlook. Investment-grade bonds will benefit from more attractive government bond valuations. Emerging market bonds can offer higher yields, but have potentially higher default rates.»
Certain assets help building inflation-resistant portfolios
Tangible assets, alternative assets and commodities will also be crucial to building inflation-resistant portfolios, according to the experts: «Private equity, especially in the U.S., tops our ranking of expected returns, while on a risk-adjusted basis, global private debt is preferred. Hedge funds can also generate attractive returns with low risk. Real estate and infrastructure are vulnerable to the impact of climate-related events, but are attractive from a diversification perspective, which will be critical to achieving higher returns in an environment of greater risk.» All in all, the experts advise finding a new approach across all asset classes that helps generate long-term returns in the changed environment.
