Hamish Chamberlayne, Head of Global Sustainable Equities, reflects on the last quarter of 2021 and looks ahead to the opportunities in the world of sustainability.

Key takeaways:

  • Countries globally continue to commit to harder and faster emissions reductions, accelerating the transition to a low carbon economy.
  • Technology led the way in the last quarter of 2021, with many large tech names posting strong returns. However, some software companies suffered from lower-than-expected results.
  • We expect 2022 to be characterised by ongoing tensions between secular growth companies and the post-pandemic ‘reopening’ of the global economy but urge investors not to be distracted by this short-term noise.

Continuing US fiscal and monetary stimulus and strong corporate earnings made for a strong finale to 2021, which saw the most recorded rises for equity markets around the world. However, bouts of uncertainty persisted, with speculation over possible interest rate rises and inflationary pressures among the factors that kept investors’ enthusiasm in check. Other features included volatility in Asia caused by uncertainty in the Chinese property market, most notably the highly indebted company Evergrande, which defaulted on some of its debt payments. COVID-19 also continued to cast a shadow, with the Omicron strain of the virus causing a resurgence in positive cases globally. While this led to a significant equity market sell-off in November, early data indicated this variant appears to be less potent than predecessors, and global equity markets then recovered to finish the year on a strong note.

The long-term view on COP26 is promising

With regards to sustainability, the 26th United Nations Climate Change Conference (COP26) took place in November in Glasgow. While most of the countries attending the conference acknowledged that the steps being proposed are not strong enough to achieve the target of 1.5 degrees Celsius, which is viewed as essential to limit catastrophic environmental events in the coming years, important progress was made, and we take a positive view on the outcomes. The highlights included greater ambition on emissions reduction from important players including China and India, an agreement that all countries will review their nationally determined contributions annually rather than every five years, and greater clarity on carbon offsetting.

Carbon emissions

These factors are important for the stocks in the portfolio. We take a longer-term focus and believe that the direction and pace of travel is more important than any snapshot timed to coincide with a global conference. The crucial point is that COP26 achieved alignment on the need to accelerate decarbonisation.

Over 2021 as a whole, we saw significant progress in the low carbon transition, with electric vehicle (EV) sales markedly higher than the previous year. We expect this trend to continue, with higher oil prices and government initiatives further boosting demand for EVs. The progress at COP26 on carbon trading markets, and transparency for the accounting and reporting of targets and emissions should also be a powerful incentive for change.

Tech, but not all tech, leads the way

The technology sector led the way in the last quarter of 2021 with a double-digit increase over the period in US dollar terms. Despite this, several software holdings posted disappointing performance. Many of these companies have performed strongly over the past few years, so there was scope for profit-taking after they reported operating results that were not quite as high as expected, notwithstanding the fact that they are still growing at a high rate and their fundamentals remain attractive.

Looking ahead to 2022

WarehouseDuring 2021, supply chain issues became a problem for many sectors including semiconductors, global energy and consumer goods. These difficulties revealed the fragility of the global ‘just-in-time’ supply chain architecture and highlighted the blind spot in supply chains from an environmental, social and governance (ESG) perspective in areas such as human rights and pollution. This will likely remain a major theme in 2022, with implications for inflation, geopolitical tensions in areas such as China and Taiwan, human rights and energy security.

As was the case over the past 12 months, we expect the 2022 market environment to be characterised by ongoing tensions between secular growth companies and the post-pandemic ‘reopening’ of the global economy. We believe that the powerful secular growth trends of digitalisation, electrification and decarbonisation will play a huge part in the development of a more sustainable global economy and will drive myriad investment opportunities. While there may well be heightened volatility as the global economy contends with the rising inflationary pressures stemming from current economic and supply-chain dislocations we would urge investors not to be distracted by the inevitable flip-flopping of growth versus value. A period of inflation is likely to be beneficial to the growth of many of the companies in which we are invested, as it makes the economics of sustainable businesses more compelling and accelerates the level of investment into the low carbon energy transition.

We continue to look for companies that will have exciting growth opportunities as a result of this. We also seek those with cultures of innovation and built-in financial resilience. We are as excited as ever by the range of investment opportunities we see in 2022 and beyond.

 

Glossary

Growth – shares of a company which generally show above-average earnings and that are expected to grow at a rate significantly above the average growth for the market.

Value – shares of a company that appear to trade at a lower price relative to the company’s fundamentals, such as dividends, earnings or sales.

Volatility – the rate and extent at which the price of a portfoliosecurity or index, moves up and down. It is used as a measure of the riskiness of an investment.