Thematic Investing

 

Climate change, an immediate challenge shaping long-term asset views   

March 2023 | 2 minute read | Marketing Communication   

Climate change is the challenge at the top of policymakers’ agendas and one of the main elements in the global debate today. Even if this phenomenon is not new, as scientists started to warn the public about rising global temperatures already in the 1980s, it has acquired a new meaning over the last decade. As environmental catastrophes became increasingly present in the news, popular movements have contributed to reignite the discussion and influence global decisions.

This issue has pushed economic experts to embed physical and transition risks in their forecasts and institutions have had to reassess both monetary and fiscal policies. What is going to happen is still uncertain, as the situation is constantly evolving. 

Based on the data included in a report realized by the Amundi Institute, we are considering a “central scenario”, a 30—year period where we expect climate policies to be slowly introduced starting from 2025, but in an uneven way. Energy transition improvements, while not sufficient to meet the 1.5°C above pre-industrial level goal, may contribute to keep global warming below 2°C.

Under this scenario, we believe it is probable that physical risks will be limited in comparison to the transitional risks. The energy transition could further exacerbate both regional and country divergences, target taxation may lead to an increase in cost of fossil fuels, with a green commodities cycle pushing up inflation. Considering this, central banks may react by launching “green quantitative easing”, further expanding their balance sheets to support government debt in an unprecedented way. The market could then be characterized by lower earnings per share, decreased bond yields and wider spreads. Debt patterns, commodity prices and production costs could also be impacted, influencing forecasting techniques.

Overall, alternative opportunities may potentially be found, even in this challenging scenario. 

We foresee that government bonds will only be marginally affected by the inclusion of climate considerations, while credit and Emerging Markets bonds could see a general spread widening. In terms of Equity, we expect returns may be impacted unevenly across regions, due to different ESG flows. Therefore, Emerging Markets and Asia could be in a better position if compared to other areas. EPS annual growth may face a decrease up to 20% in the next 30 years.

We foresee that government bonds will only be marginally affected by the inclusion of climate considerations, while credit and Emerging Markets bonds could see a general spread widening. In terms of Equity, we expect returns may be impacted unevenly across regions, due to different ESG flows. Therefore, Emerging Markets and Asia could be in a better position if compared to other areas. EPS annual growth may face a decrease up to 20% in the next 30 years.

From an asset allocation perspective, one possible strategy could be to focus on real returns in an environment characterized by higher structural inflation. Green bonds, especially US, EM and Chinese may play a positive role in portfolios. For equities, value sectors such as materials, energy, financials could perform better overall. Higher inflation could contribute to increase investments in infrastructure and other real assets such as real estate may reap high returns. Lower growth and high inflation may push up the demand for US dollar, but geopolitical rivalry could increase diversification among central bank reserves, benefitting the Chinese Yuan and gold.     

Climate change has the potential to bring a unique opportunity to those willing to question and rethink their approach. As the immediate effects of this phenomenon are visible to everyone today, we believe it is crucial that the world takes action towards improved energy efficiency and increasing the use of renewable sources.

In an ideal world, if we could flick a switch and stop all of our damaging activities overnight, then we would. However, making the changes in stages – or ‘transitioning’ – means we can try to help countries and communities whose livelihoods would otherwise be in jeopardy make the necessary adjustments for a sustainable future.

There are other frameworks to guide us, such as the UN’s 17 Sustainable Development Goals. These are a detailed set of objectives aimed at ending poverty, protecting the planet and improving the lives and prospect for everyone that were adopted by all UN member states in 2015. They include to “take urgent action to combat climate change and its impacts”; in other words, climate action.

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Important Information
Unless otherwise stated, all information contained in this document is from Amundi Asset Management S.A.S. and is as of end of April 2022. 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: July 2022

Doc ID: 2279420