ESG and sustainable investing: navigating adverse weather systems

Hamish Chamberlayne, Head of Global Sustainable Equities, answers key questions on the drivers shaping environmental, social and governance (ESG) and sustainable investing in 2022 and beyond.

How has the sustainable investing and ESG narrative evolved so far this year?

Equity markets have faced stiff headwinds this year, and for ESG investing it has been a near perfect storm. The Russia/Ukraine conflict, rising inflation, slowing growth, central bank activity, and the lingering impact of the pandemic have created much uncertainty at a macroeconomic level. This has combined with a shift in market rhetoric to a strong anti-growth and less positive ESG stance leading to stronger performance from sectors typically not associated with sustainable investing, such as energy, defence, tobacco and commodities. The good news, however, is that we see this as a natural correction and a logical outcome of the excesses of the ESG bubble that formed in markets last year.

While the current environment is challenging for growth and ESG, it is actually reinforcing the medium-term trends we are focused on. Energy security, economic resilience, and supply chain re-localisation are all very aligned with our sustainability themes. Regulators and governments have also maintained their focus on ESG with steps being taken to support the migration to a more sustainable global economy.

Short-term challenges for ESG investing have been meaningful, but the longer-term direction of travel is unchanged, and has potentially accelerated. We therefore view the volatility as an overdue shakeout of the excesses in the system and supportive of the sustainability investment trends that we as a team are focused on.

How have rising energy prices and inflation impacted sustainable investing?

Energy stocks have been some of the big winners this year and sustainable investment approaches, such as our own, that do not offer exposure to oil and gas companies have been negatively impacted. While a negative for ESG and sustainable investing in the short term, we believe higher oil and gas prices will accelerate the adoption of products and services from companies providing sustainable solutions. Sustainability is closely linked to innovation and we seek businesses that are transforming the world for the better. An obvious example is the renewable energy sector and related development projects. As oil and gas prices rise, the number of projects that can generate acceptable returns increases. More broadly, we are witnessing greater demand for many renewable projects.

In terms of inflation and the rate of change of interest rates, which is currently worrying markets, we believe this should be viewed as a move back towards normalisation. From a relative perspective the increase in interest rates is significant given the starting point of close to zero but, taking a step back, interest rates are still at multi-decade lows. We therefore continue to see these levels as representing favourable conditions for growth.

Has the landscape fundamentally shifted for ESG investing?

It is important to note that we are long-term investors, which means not reacting to short-term trends, notably the sector moves and style rotation we are currently experiencing. We believe the trends we have built our approach around remain very much in place and, if anything, have accelerated. When we look globally, we see a lot of concerns around supply chain fragility, economic resilience, reshoring manufacturing, re-localising supply chains, and energy independence. These play into the sustainability trends that we are focused on. We therefore see volatility as an opportunity to take advantage of a market shaped by short-term fear.

Our focus has always been to seek companies with proven business economics and cash flows. Many sustainable companies offer strong compounding potential because they provide solutions to key societal and environmental challenges and have the potential to do well in an inflationary environment. While the ‘weather’ will continue to blow through markets, we welcome the longer-term opportunities they bring.

Visit the Janus Henderson website to find out more about the Janus Henderson Global Sustainable Equity strategy and discover the latest expert insights from their team.

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