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Inflation driven by new green policies to boost some stocks and sectors – Strategists

Inflation driven by new green policies to boost some stocks and sectors - Strategists

Overview:

  • Shah identified four distinct variables that will push up the cost of doing more environmentally friendly business, called “en-flation” by some
  • To weather the “en-flationary” environment, Shah advised investors to fund blue-chip economic franchises that can “stretch their prices rather than bear the rising costs themselves.”

Complying with Net-Zero initiatives

According to Seema Shah, chief strategist at Principal Global Investors, inflationary pressures coming from the attempts by governments and corporations to adhere to net-zero objectives. This would extend far beyond energy prices.

She identified four separate elements that will add to upward pressure on the expense of doing more environmentally friendly business, called “en-flation” by some.

Climate Penalties go harder

Second, Shah stated that it is realistic to predict that sanctions for firms failing to fulfill UN climate targets will become more severe.

“The MSCI Net Zero Tracker, which analyses the collective progress of listed companies toward climate goals, recently found that these firms are on track to cause a global temperature rise of 3°C. And many are still failing to disclose crucial information on emissions,” Shah added.

The Hague District Court ruled in May that Royal Dutch Shell must reduce its carbon emissions by 45 percent by 2030, making it the first firm to be legally required to comply with the Paris Agreement.

“With governments’ environmental obligations under heightened scrutiny to meet the Paris goals, it won’t be long before politicians and regulators move to impose harsher penalties,” Shah added.

She cited research from the British employment think tank Onward, which indicated that new positions created to achieve net-zero goals pay 18 % more than the national average in the U.K.

“Finally, it stands to reason that, as business models adjust to become more environmentally friendly, investment in technology and R&D spending will rise across the board,” Shah said.

Benefits for investors

To withstand the “en-flationary” environment, Shah advised investors to back blue-chip economic franchises that can “stretch their prices rather than bear the rising costs themselves.”

“Luxury merchants, for example, can raise prices without sacrificing a considerable number of customers,” she continued.

“The United States is energy independent, and consumers have healthy surplus savings to bear increased prices,” she explained.

“Europe, on the other hand, is more vulnerable as a net energy importer. Another element that will very certainly contribute to equity outperformance in the United States over Europe will be present in the coming months.”

“More money spent on innovation means less money available for rewards on the balance sheet.” Investors may see more opportunities from growth than conventional income sectors as companies take initiatives to green their business models,” Shah added.

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