The outlook for sustainable investment is diverging globally, simultaneously being propelled forward by regulation in Europe and parts of Asia, most notably in China, and being significantly challenged by growing politicisation and controversy in America.
2023 will be a year of unprecedented policy support.
As Al Gore said at the opening of COP 27 in Sharm El-Sheikh in November, we cannot choose our misfortunes, but we can choose the benefits that come from them, especially when it comes to renewable energy. Indeed, we are in the early stages of a sustainability revolution that will have the scale of the industrial revolution and the speed of the digital revolution.
At present, the energy mix in the European Union is 42% fossil fuels, 35% renewable energies and 22% nuclear energy. And as the current crisis has unfortunately highlighted, most of the gas consumed in Europe comes from Russia (see graph below).
We have seen two major steps in the European regulation intended to promote sustainable investment and prevent greenwashing. None has been without controversy and concerns but it continues to move the industry in Europe ahead at a faster pace than elsewhere.
The Inflation Reduction Act (IRA) was signed in law by President Biden on 16 August 2022 after House Democrats approved the biggest-ever federal investment against climate change with a 220 to 207 vote.
In 2021, the 27 EU member states and the European Parliament agreed to enshrine the goal of carbon neutrality by 2050 in a „climate law“. And this „Green New Deal“ is much more than just wishful thinking, as it not only sets ambitious targets but more importantly provides for massive investments, particularly in infrastructure. So to make the most of it, the biggest winners could be direct investments in infrastructure projects.
During the synchronised sell-off in markets in January – mainly due to massive sector rotation in favour of “value stocks” – clean energy sector stocks suffered. And yet, the transition to clean energy keeps accelerating.
Unlike large caps, where it is difficult to add value and where passive strategies can provide an effective response, for small caps, active management offers a real opportunity to outperform the market by a wide margin. Not to mention its clear benefits in terms of responsible investment and shareholder advocacy.
Sustainable investment continues to charge on. Indeed, according to PwC, more than half of all planned ETF launches for 2022 are expected to be ESG tilted, including 80% of those in Europe. Expectations of investors alongside corporations continue to rise, alongside growing concerns about greenwashing.