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The state of the stock market, sustainable investment and ESG

Sustainable Investing

The information contained in this article is not intended to be interpreted as any form of financial or investment advice or recommendation. Capital at risk.

Inflation is on the rise. This story is in the news and impacting our lives on an almost daily basis. In our latest blog, our Chief Investments Officer, Marc, provides his thoughts on current trends, sustainable investing and ESG.

World stock markets have declined sharply this year. The key reason is that inflation has risen to its fastest rate for 40 years in most developed economies.

As a result, central banks will need to raise interest rates several times and the fear is that this will cause a recession. It is impossible to forecast what will happen to the economy or stock markets. However, it is clear that the current bout of inflation is more than just a blip because prices are rising across a very wide range of goods, not just energy.

Since interest rates are a key driver of stock market returns, the fear that they might need to rise considerably higher is currently depressing stock market returns. Even though stock markets are facing challenges in the form of – rising interest rates, economic transition in the use of technology, international political uncertainty and, most importantly, climate change – the good news is that stock markets historically have risen over time as companies adjust to the changing environment.

The one issue we can be sure of is that climate change will remain key both as a driver of economic policy and social change. Investing in companies that drive economic change is a sensible alternative investment strategy rather than investing in fossil fuel related assets. The latter will decline in value as their true economic cost is increased by the imposition of carbon taxes. Of course, there will be periods when climate damaging strategies provide superior short-term returns, such as energy stocks this year as a result of the unprecedented rise in energy prices. As we have seen, however, these companies will also be the target of government policy in the form of price controls or special taxes which will undermine the share price performance of those companies.

Sustainable Investment

The bottom line is that people need to invest for their future. Existing and new investors should consider pursuing an investment strategy that is in keeping with the long-term trend of decarbonising the environment to help protect the environment and their investments from the ravages of climate change. The good news is that data over the last 5 years shows that sustainable investments have outperformed non-sustainable investments.

Gone are the days when the only requirement of capital was to make a profit. The realisation that unfettered capitalism was destroying the planet, creating social division and inequality, brought about the need for additional considerations for the deployment of capital rather than just financial returns.

This started with ethical investment which transitioned into today’s popular ESG investing as people wanted to recognise that companies’ activities should take account of environmental, social and governance issues. But if the environmental crisis is the highest priority, as surely it must be, and also requires the largest effort in terms of changing the way society operates, is it the best strategy to blend it with social and governance issues? The answer is partly provided by the fact that global CO2 emissions continue to rise, increasing by their largest amount in 2021 to an historic high of 36.3bn tonnes in 2021. According to Encon this requires between 1.1tn and 1.6tn trees to offset the emissions.

GreenGrowth fully supports the above investment approach and this is why we put climate change at the centre of our investment offering.

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