EU/UK outlook: Alignment with green legislation will drive returns

Fund managers of ESG equity strategies share their predictions and preferences for 2023

While UK equities are starting to appear attractive again to fund managers of sustainable strategies, there are still a number of headwinds for investors in 2023 – inflation, consumer demand and slowing global growth to name a few.

However, companies focused on plastic reduction, the energy transition and digitisation have the potential to offer attractive returns.

Here, fund managers share their 2023 outlook for the UK and European regions:

Alignment with the European Green Deal

Roseanna Ivory, investment director, abrdn

“With real yields now back to their highest levels in more than a decade, there are a number of exciting ESG investment opportunities for 2023 presented by the market volatility. Given the ongoing devastation being inflicted worldwide due to climate change, investing our capital into more sustainable companies should provide superior returns over the long run, and where alignment with legislation such as the European Green Deal actually drives superior growth for some companies.

“We want to see more government support through regulation, such as the introduction of Deposit Return Schemes, which are used across the world as a way of encouraging more people to recycle plastic and aluminium containers. These are due to be introduced in Romania, Scotland and Ireland in 2023. Consumers and our end investors have not stopped caring about ESG, and nor will we.”

‘The challenge is likely to be the demand outlook’

Matt Evans, portfolio manager, Ninety One UK Sustainable Equity Fund

“The operating environment for UK companies is set to be challenging as the inflation headwinds remain, especially around labour. If this can be managed, then raw material costs and energy may ease relieving some pressure on margins. An area to watch is the demand environment as we are likely to enter some form of global recession. However, much of this is now known and so it is about the depth and extent of the impacts. Many valuations reflect this tough outlook and so assessing how much of this is priced in will be interesting as we work through the year.

“However, in general UK sustainable equities start the year with valuations that look more appealing than 18 months ago. The challenge is likely to be the demand outlook – will companies, and therefore customers, have the confidence to invest and spend? The long-term structural opportunities in areas such as the energy transition, healthcare and digitisation and efficiency remain, and so, although the short-term outlook remains uncertain, the longer term trends, if anything, seem even more embedded.”

We have started adding to UK exposure again

David Harrison, fund manager, Rathbone Greenbank Global Sustainability Fund

“Equity markets are likely to be volatile in 2023, given continued macroeconomic uncertainty.  There are tentative signs that inflation is peaking across multiple regions, which is clearly positive for businesses and individuals.  At the same time, we are seeing slowing global growth whilst monetary policy is likely to remain restrictive.

“We see compelling opportunities in specific areas such as energy transition and in water infrastructure, particularly in Europe and the US. The energy transition is still relatively early in its evolution and is growing in terms of size and investable assets.

“In particular, certain parts of the European market remain attractive – valuations became extremely cheap in 2022 and we were given the opportunity to invest in leading global franchises with strong sustainability drivers. The UK has also become a region where we have started to add exposure again as we move past the political issues of 2022 and valuation also remains depressed.”