Three directions of sustainable finance in 2023

Although the global economy may be marked by a sharp slowdown this year, investors should rely on long-term themes.

2022 was marked by a sharp slowdown in topics related to sustainable finance for several reasons. First, rising fossil fuel prices have temporarily put the oil giants back in the spotlight. Russia’s aggression against Ukraine raised the issue of the importance of the arms sector in the defense of democracies. In general, some companies related to renewable energy have suffered from the increase in the price of raw materials. While these risk factors remain in the headlines, what does 2023 hold for us for ESG topics?

LARGE RETURN OF CONTINUOUS BONDS

With over $900 billion in 2021, sustainable bond issuance (along with environmental and social goals) is expected to remain strong. This increase in issuance actually deepens the green and social bond market, a beneficial factor for investors. Over the past five years, bonds have been relatively neglected in an environment of low or even negative interest rates. While most central banks have raised key interest rates this year to combat inflation, bonds now offer a more attractive carry and risk/return profile. German and US government bond yield curves are steepening, with bond yields higher at shorter maturities. Therefore, we currently favor short-term green bonds to benefit from better carry and lower duration risk.

ENERGY TRANSITION AND GREEN INVESTMENTS

2022 was marked by a strong performance by companies in the fossil energy sector, with oil prices more than doubling between January and June. This development temporarily overshadowed players in the renewable energy sector, while fast-growing companies suffered from rising bond yields. Decarbonisation of the economy remains a long-term trend. While reducing greenhouse gas emissions is essential to achieving carbon neutrality goals, renewable energy companies should benefit from increased demand as well as government assistance, such as the US’s Inflationary Relief measures. Act. Despite being outside the scope of the European taxonomy defining sustainable activities, major emitters in sectors such as utilities, materials or energy are increasing their green investments in order to develop new technologies and energy infrastructures or to further develop production capabilities. efficient. As a result, their investment decisions, despite having a strong negative short-term impact on their valuations, can have major implications in the global fight against climate change.

CIRCULAR ECONOMY

Ultimately, the emergence of a more circular economy will play a key role in limiting global temperature increases. Of the 100 billion tons of resources the planet consumes each year, only 8.6% is re-injected into the economy. On the contrary, more than 90% of the resources extracted to meet our needs are wasted (Circularity Gap Report 2022). Therefore, the trend towards a more circular economy should benefit waste management professionals as well as companies involved in the reuse or repair of goods and materials.

Source: Smart Prosperity Institute, Indosuez Wealth Management

Although the global economy may be marked by a sharp slowdown this year, investors should rely on long-term themes. Normalizing inflation and lower long-term interest rates could also support valuations of growth companies, resulting in a more favorable environment, especially for companies related to the energy transition.

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