Take action with your investments on the journey to Net Zero

 

Take action with your investment on the journey to Net Zero

July 2023 | 5 minute read | Marketing Communication

The energy transition¹ could provide a range of opportunities for investors who are aiming to generate positive returns while seeking to make a tangible contribution towards climate change.

Let’s start by defining Net Zero. Put simply, Net zero is a global objective where we each must contribute to reducing greenhouse gases to as close to zero as possible, with the remaining emissions being reabsorbed in the atmosphere, for example by the oceans and forests².

Seems clear, right? Well that’s not the case in reality.  In fact, collectively we are far from reaching the objective of carbon neutrality by 2050.

According to Jean Jacques Barbéris, Head of Institutional and clients division and ESG at Amundi, we need to lower the amount of emissions we’re creating and continue to maintain and develop carbon sinks³ to remove Greenhouse Gases (GHG) from the atmosphere⁴.

But how can investors get involved? The European Net Zero offering is expanding. Data from Broadridge highlights that the European market for Net Zero strategies has grown rapidly in the last 3 years⁵. There are now 183 Net Zero open-ended funds (both active and passive). The research estimates net sales of +€21bn in the last 3 years.⁶ Furthermore, in April 2023 Amundi was proud to be the first Asset Manager to launch a range of active and passive Net Zero strategies across all asset classes.

With this in mind, you’re probably wondering what the impact of the Net Zero transition could be on expected returns and asset allocation? According to Monica Defend, Head of the Amundi Institute, there’s a growing global consensus on the urgent need to combat climate change,  and we might face a rocky Net Zero transition pathway. Governments’ uncoordinated reactions to energy price spikes in the past year show that a successful and orderly transition to a greener economy is far from guaranteed⁸. These uncoordinated policy actions towards Net Zero could lead to higher inflation in the short term and a more uncertain long-term growth outlook. With this in mind, bonds are back as portfolio risk diversifiers*. In our view, emerging market equities and real assets could potentially boost returns to levels that traditional 60-40 portfolios could struggle to deliver. If we look at the impact of Net Zero targets on asset allocation, our findings suggest that integrating them into a standard 60/40 portfolio has a limited impact in terms of performance, but may lead to a higher tracking error in the short term as the economy is not yet aligned with a Net Zero trajectory⁹.

The shared goal or endgame is to limit the rise in temperatures to achieve the Net Zero objective by 2050. In our view, the actions taken to reach this goal could have a concrete effect on the real economy and financial markets. For example, we believe that rising carbon prices and high commodity costs could affect inflation and growth patterns. As a result, governments could have an active role to play and identify measures targeted towards households and climate-related corporations in particular.

The impact of the Net Zero transition on asset classes

There are possible implications from a risk and opportunity perspective associated with shifting towards a Net Zero world which we believe investors should consider or factor in. These implications are driven by new policies, technology, and changing consumer preferences.

In an era of more urgent but less coordinated transition, we expect equity returns will be lower over the next ten years than in the past decade.  In our view, the US remains favoured among developed markets and we believe emerging markets (EM), particularly Chinese and Indian stocks, could seek to offer interesting opportunities. From a sectoral perspective, the leaders in the green transition will be favoured along with Information Technology, and the outlook for value investing looks positive.

After a lost decade, bonds are returning to their long-term trend, reviving their role as a portfolio risk diversifier*, although we are anticipating higher volatility given greater uncertainty and a weaker economic outlook.  We believe investment grade credit may benefit from higher government bond valuations and that EM bonds could offer higher yields, but may be challenged by potentially higher default rates.

We believe real and alternative assets, as well as commodities, could be crucial for building inflation-resilient portfolios. Private equity, particularly in the US, tops our expected returns ranking, while, on a risk-adjusted basis, global private debt is favoured. Hedge funds may offer an appealing profile, having the lowest risk across the spectrum of real and alternative assets, and appealing returns. In our view, real estate and infrastructure could be vulnerable to the impact of climate-related events, but are appealing from a diversification* standpoint, which will be key to targeting higher returns in an environment of higher risks¹⁰.

If you want to get started on your Net Zero journey

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Sources: 

* Diversification does not guarantee a profit or protect against a loss
¹ World Meteorological Organization, 10 July 2023
² Intergovernmental Panel on Climate Change
³ A carbon sink is a place that absorbs more carbon than it emits carbon, https://education.nationalgeographic.org/resource/carbon-sources-and-sinks/
⁴ Amundi Client Call, Working together on the road to Net Zero, 11 July 2023
⁵ Broadridge, European open-ended funds, data as of end April 2023
⁶ Broadridge, European open-ended funds, data as of end April 2023
⁷ Broadridge, European open-ended funds, data as of end April 2023
_⁸ Amundi Client Call, Working together on the road to Net Zero, 11 July 2023
⁹ Amundi Institute ‘A Rocky Net Zero Pathway, 28 March 2023
¹⁰ Amundi Institute ‘A Rocky Net Zero Pathway, 28 March 2023

Important Information

Unless otherwise stated, all information contained in this document is from Amundi Asset Management S.A.S. and is as of 18 July 2023. Diversification does not guarantee a profit or protect against a loss. The views expressed regarding market and economic trends are those of the author and not necessarily Amundi Asset Management S.A.S. and are subject to change at any time based on market and other conditions, and there can be no assurance that countries, markets or sectors will perform as expected. These views should not be relied upon as investment advice, a security recommendation, or as an indication of trading for any Amundi product. This material does not constitute an offer or solicitation to buy or sell any security, fund units or services. Investment involves risks, including market, political, liquidity and currency risks. Past performance is not a guarantee or indicative of future results.

Date of first use: 20 July 2023

Doc ID: 3008058