Equities

UK/EU Outlook 2022: Managers look to carbon risk and growthflation

ESG fund managers investing in UK and European equities give their predictions for 2022

Companies with less carbon risk will perform well

Camilla Ritchie, senior investment manager, 7IM

“There is no doubt about it, 2021 has been a difficult year for ESG equities as a whole. Catch up by value stocks after the emergence of a Covid vaccine and a rising oil price driving up the profits and share prices of oil companies put brown equities ahead of green in 2021. What does 2022 hold for investors in ESG equities in the UK and Europe?  We think there will be an economic normalisation following two years of disruption from the Covid pandemic, supported by a drive to combat climate change.

“The pledges that came out of COP26 in Glasgow may not have been as ground-breaking as the COP21 Paris Agreement, but Glasgow has kept the climate change momentum up, so we think that UK and European companies will be putting the climate agenda front and centre in 2022. Reporting on carbon emissions – both the direct and indirect Scope 1 and 2, and the Scope 3 emissions across the whole value chain – is revealing that companies that score well in ESG terms have less carbon risk, and we think these companies will be the beneficiaries in 2022.”

Challenges remain within supply chains and labour markets

Duncan Goodwin, fund manager, Premier Miton Global Sustainable Growth Fund & Premier Miton Global Sustainable Optimum Income Fund

“After high profile events such as COP26, we will see policies legislated in UK and Europe, which in turn should provide clarity, enabling companies to commit growth capital.

“With growing expectation comes growing risk of disappointment. The greatest challenge to meeting growth expectation remains within the supply chain and labour markets. Conversely, strong and growing demand for products and services is the largest opportunity.

“We therefore see winners in 2022 as those that can best navigate the supply challenges, close the gap of supply against high demand that exists now, and materially grow earnings. We expect this widening spread of operational delivery to be the largest change in 2022, along with an increase in pace of innovation in areas such as fuel cells and energy storage battery technology.”

A period of growthflation appears likely

Chris Hiorns, fund manager, EdenTree Responsible & Sustainable Managed Income Fund

“In the absence of a severe negative economic shock such as Omicron once again shutting down the global economy a period of growthflation appears likely. There have been increasing indications that the unprecedented extent of quantitative easing and extensive fiscal policy support provided to stimulate the global economy during the height of the Covid pandemic is now feeding through into a strong recovery but also a far more inflationary environment.”

“There is plenty of evidence the inflationary pressures building in the global economy are now deep seated and present in virtually every area of the global economy. Whilst the sharp rise in commodity prices is unlikely to be repeated in 2022 it is not evident that they will fall back much from their current elevated levels.

“It is prudent now to reduce exposure to fixed interest as in a growflationary environment higher interest rates and bond yields are likely to lead to large capital losses. Equity markets outside of the US, where valuations are clearly excessive, appear an attractive alternative, though some caution must be exercised with the level of economic disruption from the Omicron variant still very uncertain.

“Infrastructure investments appear to offer an appealing alternative with a far lower level of economic risk than equities but offering a much higher yield than the investment grade fixed interest.”

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Natalie Kenway

Natalie is global head of ESG insight for ESG Clarity and has been an investment journalist for 16 years. She won Editor of the Year at the Aviva Investors Sustainability Media Awards 2021, and was Winner...