Executive Summary

We share our perspective on key themes that will shape global markets in 2022 as the transition to a more sustainable economy continues

Consensus is broader than ever that urgent action is needed to keep the Paris climate goals within reach. At the landmark UN COP26 climate summit held in November, almost 200 countries agreed “to pursue efforts to limit the [global average] temperature increase to 1.5°C” and, for the first time, on the need to reduce global emissions by 45% by 2030 compared to 2010 levels.

COP26 was by no means an unmitigated success but, crucially, it laid the foundations for real progress in getting national economies on track towards net zero. The hard work begins now, starting with policymakers strengthening 2030 targets and detailing how they intend to meet their goals.

We believe that with momentum from COP26, and the growing incidence of extreme weather events, there will be sustained focus on policies that address the threats posed by climate change in 2022, and beyond. Paramount too is the related need to stem biodiversity loss.

The year ahead will also be defined by the ongoing impact of the COVID-19 pandemic and our gradual adaptation to it, including the strains on society and working life, as well as the inflationary and supply-side pressures placed on the global economy. We will be closely – and cautiously – watching developments on the battle between vaccines and new variants of the virus as they unfold.

Over the coming year, here are some of the key themes that Impax believes will shape global markets:


An inflection point towards global net zero

The standout success at COP26 was the emergence of large ‘coalitions of the willing’ around key issues like ending deforestation and curtailing methane emissions. Although they only go some way to delivering the emission reductions needed by 2030 (see chart below), pledges made in Glasgow represent a significant step forward.

So long as the governments, companies and investors making up these coalitions follow through on their commitments, we expect these pledges and the push for more ambitious 2030 goals to amplify investment opportunities. Products and services that improve the efficiency of buildings, industrial processes and electricity transmission, will be in growing demand. Engineering solutions that address fugitive greenhouse gas emissions will too: more than 100 countries pledged to cut methane emissions by 30% by 2030.

Whilst the language on coal in the UN COP26 decision could have been stronger, a separate agreement1 to phase down coal power generation signed by 50-plus countries and jurisdictions provides further tailwinds for renewables. Although the world’s largest coal producers China and India were absent from the deal, both have also announced ambitious renewables targets.

As they work to understand the opportunities, debt and equity investors must also look more carefully at both physical and transition climate risks. Practically, there is a clear need for more granular information and methodologies for translating environmental hazard into financial risk. Progress is needed here in 2022. Tools like the climate disclosure dashboards developed by the Climate Financial Risk Forum (with input from Impax) will help.

Source: Energy Transitions Commission, November 2021

We believe in carbon pricing as a mechanism for capturing the environmental costs of economic activity and sending price signals to encourage investment into net-zero technologies. Carbon pricing initiatives have already been implemented in more than 40 countries, covering just over 20% of global emissions.2 EU proposals for carbon border tariffs on imported goods should encourage other jurisdictions to introduce carbon pricing regimes, rather than letting the EU capture the fiscal benefits.

While UN approval is not necessary for national governments to introduce carbon pricing, progress on international carbon markets was made at COP26 with agreement on a framework for trading emissions credits between countries and between private actors. This could possibly open the door for valuable revenue streams to start flowing towards nature-based solutions like rainforests.

A spotlight on biodiversity

Environmental degradation has brought us close to irreversible tipping points for nature, and the costs of inaction are immense. Not only does more than half of the global economy depend on nature,3 but nature-based solutions could contribute up to one-third of the emissions cuts needed by 2030.4

Building on the growing awareness of the vulnerability of nature and its links to tackling climate change, biodiversity and deforestation commitments made at COP26 shine a spotlight on agriculture and food production, which contributes 26% of global emissions as well as vast ecological damage5. We expect these issues to gain further attention from investors in 2022, not least as attention turns to the next UN biodiversity summit, COP15, hosted in China in May.

Over half of global GDP, $44 trillion, is potentially threatened by nature loss

(WEF, 2020)

The finance industry is already waking up to the risks associated with biodiversity loss. The Taskforce for Nature-Related Financial Disclosure, which Impax has supported since its inception, is creating protocols for recognising threats to biodiversity and developing metrics for measuring impacts and avoiding additional biodiversity loss. In 2022, we will continue to focus on biodiversity through our company engagements and investment process, and as part of the Natural Capital Investment Alliance, which aims to hasten the development of natural capital and biodiversity as a mainstream investment theme.

The opportunity set continues to widen. We anticipate further technological innovation in solutions delivering natural capital benefits, in areas such as water treatment and infrastructure, pollution control, and sustainable food and agriculture.

A more interventionist China

As a voracious consumer and vast producer of an array of goods, modest tweaks in Chinese domestic policy can disrupt global markets. 2021 was a year that saw forceful interventions in the economy by the Chinese government, prompting sell-offs in certain sectors.6

China’s largest technology groups lost >US$1 trillion in combined market capitalisation, February to August 2021

(Bloomberg, 2021)

The ‘common prosperity’ drive, which looks to close inequalities within the world’s second-largest economy, has led to anti-trust clampdowns in sectors prone to monopolies or oligopolies, such as fintech and the internet. The state also intervened to cut costs for people in the healthcare and education sectors, calling time on the country’s US$120 billion private tuition industry.7

These crackdowns exemplify the policy risks facing investors in China. Our sense is that these risks have not abated, especially ahead of the 20th Communist Party Congress in 2022, which will decide the leadership and the high-level policy direction for the next decade. Nonetheless, China remains committed to its carbon neutrality pledge and green development mandate to improve living standards while gaining advantages in emerging industries, such as electric vehicles (EVs) and automation. We do not therefore believe environmental solutions are at risk.

A global economy under strain

The vulnerability of global, just-in-time supply chains was highlighted in 2021. The six-day blockage of the Suez Canal – a passage for 13% of the world’s trade8 – displaced ships and goods containers, causing a significant logistical challenge since March. Disruptions to trade also came from COVID-related shutdowns, Chinese power cuts and a shortage of truck drivers.

The semiconductor sector has been especially disrupted at a time when chip demand has been spurred by digitalisation efforts across sectors. Chip supply has been hampered not only by imbalanced global chains, but by the growing impact of ‘technological sovereignty’ on the flow of products and equipment, particularly between the US and China. The EV sector has been hard hit, with rapid consumer demand growth outpacing the availability of chips for carmakers. Unmet demand has pushed up prices for both new and used vehicles (see chart below).

In 2022, the global semiconductor shortage may be alleviated through both substantial investment in leading edge chip fabrication, for use in high-performance computing, and repurposing older facilities that make chips used for industrial applications, including EVs.

Source: US Bureau of Labor Statistics, November 2021

Recovering energy prices have been another key driver of rising consumer price inflation which, in the US, hit a three-decade high of 6.2% in October 2021.9 The extent to which the main drivers of inflation will prove transitory, and ultimately work themselves through the system, is a live debate.

In 2022, at least, inflation is likely to remain elevated, testing valuations of growth stocks. The key question is how well companies can pass on higher input prices to their customers. Broadly speaking, we expect companies in the cyclical materials, energy and industrial sectors, as well as higher-margin digital infrastructure and software companies, to weather an inflationary climate better than most.

Longer term, though, our core belief is that many of today’s inflationary pressures will abate. Pent-up demand for certain goods will ease, new capacity will be added to supply chains, and more people might be reskilled or coaxed back into the workforce. The replication of production facilities in different markets, whether to increase resilience in the face of trade disruption or due to geopolitical tensions, would also be expected to have a deflationary effect. The gradual trend towards de-globalisation would involve higher costs for businesses, indicating that the era of ‘peak margins’ might be behind us.

This should not be a scary proposition for sustainability-focused equity investors who look for resilient business models with strong pricing power. The urgency of action needed to address environmental and social challenges provides structural demand growth for companies that solve them and for those whose products and services enable them to be solved.

We believe the shares of some companies in this space are currently valued at a premium. Greater focus on climate change, in particular, has led to a re-rating of companies that can be part of the solution. The fundamentals have strengthened though, with higher projected revenue and profit growth reflecting the ramp-up in ambition to solve society’s greatest challenges.

With so much money flowing into these areas – especially in-vogue sectors like hydrogen and EVs– investors should focus on valuation discipline and long-term earnings growth, perhaps more than ever.

A new way of working

Much as the pandemic prompted companies to adapt, new ways of working forged out of necessity, and enabled by technology, are here to stay. How companies respond, in 2022 and beyond, will help define their prospects.

Company success is tied to the spirit and productivity of its workers. We believe those that empower their employees with choices on working arrangements are more likely to thrive, especially at a time when workers have more bargaining power than in most people’s memory. The ‘Great Resignation’ prompted by the pandemic – a record 3% of the US workforce quit their jobs in September 202110 – has amplified labour shortages and spurred wage inflation.

Staff retention and employee welfare will therefore remain important themes in 2022. As well as offering flexibility and support to employees, companies should not lose focus on another area brought into sharp focus by the pandemic: the importance of equality, diversity and inclusion.  

Through our engagement work, we will encourage companies to commit to improvements in the areas of paid leave, flexible work arrangements, remote work arrangements and other areas key to risk management and business continuity. Transition risks facing industries that will be transformed en route to net zero call for a massive reskilling of the workforce. 

An added tailwind for sustainable finance

Early in 2022, US federal agencies will begin implementing the INVEST in America Act, which became law in November. This includes US$621 billion for transport infrastructure and US$213 billion to make buildings and homes more energy efficient. Among the clear beneficiaries are industrial companies that will provide equipment to retrofit buildings, ‘sharing economy’ rental equipment companies, and EV suppliers.

However, the measures within this bill are insufficient to catalyse sustainable, inclusive long-term growth. The Biden administration’s ‘Build Back Better’ budget package goes further, with provisions that would hasten the net-zero transition by expanding incentives for clean energy and transportation, jumpstart the transition to a more sustainable grid, and boost research and development in net zero-aligned technologies. It also looks to strengthen society by expanding access to affordable healthcare and childcare, and by investing in education and housing. While the House of Representatives passed the bill in November, it remained under consideration in the Senate at the time of writing. We will be watching this closely.

Meanwhile in Europe, more funds will be dispersed in 2022 under the EU’s COVID recovery fund, strengthening demand for companies whose products and services address sustainability challenges. One-third of the €1.8 trillion from the NextGenerationEU package of loans and grants, and the EU’s seven-year budget, will finance the European Green Deal, which focuses on cleaner energy, technological innovation, the circular economy and public transport, among other areas.11

Separately, we are encouraged by both the dramatic uptick in issuance of green, social and sustainability-linked bonds by governments and corporates, and by robust demand for them. The debut €12 billion issuance of the NextGenerationEU green bond was more than 11 times oversubscribed this October.12

<5% of US defined-contribution plans are estimated to have any sustainable funds

(Morningstar, 2021)

There is growing recognition among policymakers that unlocking private capital, alongside public spending, is key to financing the sustainable transition. Important regulatory changes are now underway in the US that reflect this. In October, the Department of Labor (DOL) issued a proposed rule to empower pension scheme fiduciaries to consider environmental, social and governance (ESG) factors when making investment decisions and when voting corporate proxy ballots. Currently, it is estimated that fewer than 5% of defined-contribution plans in the US include any sustainable funds.13 Should it be adopted in 2022 as expected, the proposed DOL rule could stimulate growth for sustainable investment solutions.

No room must be left for greenwashing. In advance of the EU’s Sustainable Finance Disclosure Regulation, which requires asset managers to substantiate their sustainability-related claims, firms removed the ESG label from US$2 trillion worth of products between 2018 and 2020.14 We expect to see similar action from the US Securities and Exchange Commission in early 2022.

An acceleration of the sustainability transition

The sustainable economy will be fundamentally different from today’s. Not every company will successfully adapt, and entirely new technologies and industries will emerge. While posing challenges for investors, we believe this period of intensified creative destruction will create material long-term investment opportunities.

There are always short-term uncertainties that we will have to navigate, and 2022 will doubtless be no different. However, there is simply no time to waste in accelerating the sustainable transition.  Galvanised by the pandemic, promising strides have been made in healthcare innovation and the sharing economy. Next year, we would like to see real progress towards wider recognition of the risks and opportunities associated with climate change, biodiversity loss and changing working practices.

For those of us focused on the emergence of a new economy, it feels like we are only now at the end of the beginning of our journey.

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1Global Coal to Clean Power Transition Statement, 4 November 2021: https://ukcop26.org/global-coal-to-clean-power-transition-statement/

2World Bank Carbon Pricing Dashboard, 30 November 2021: Carbon Pricing Dashboard | Up-to-date overview of carbon pricing initiatives (worldbank.org)

3World Economic Forum, 2020: WEF_The_Future_Of_Nature_And_Business_2020.pdf (weforum.org)

4UN Global Compact, 2021: Nature-Based Solutions | UN Global Compact

5Our World in Data, University of Oxford, 2019, Food production is responsible for one-quarter of the world’s greenhouse gas emissions – Our World in Data

6Bloomberg data / Financial Times analysis, 7 September 2021. The combined market capitalisation of Alibaba, Tencent, Meituan and Kuaishou fell by roughly US$1 trillion between February and August 2021.

7Reuters, 17 June 2021: EXCLUSIVE China to unveil tough new rules for private tutoring sector-sources | Reuters

8World Economic Forum, 25 March 2021: What does the ship stranded in the Suez Canal mean for global trade? | World Economic Forum (weforum.org)

9U.S. Bureau of Labor Statistics, 10 November 2021: Consumer Price Index Summary – 2021 M10 Results (bls.gov)

10Economist, 27 November 2021: How to manage the Great Resignation | The Economist

11European Commission: A European Green Deal | European Commission (europa.eu)

12European Commission, October 2021: NextGenerationEU (europa.eu)

13Morningstar, 3 May 2021: Re-Envisioning ESG in 401(k) Retirement Plans | Morningstar

14Bloomberg Green, 21 October 2021: Fund Managers Brace for Correction as Greenwash Rules Go Global – Bloomberg

Bruce Jenkyn-Jones

Chief Investment Officer (CIO), Listed Equities, Executive Director

Bruce serves as Impax’s Chief Investment Officer, Listed Equities. He is responsible for supervising and overseeing investment process, policy and performance, regulatory oversight, and leads product design within Listed Equities and development as well as the application of Impax’s investment thesis across the Listed Equities product range.

Bruce is Chairman of the Listed Equities Investment Committee, and serves as Co-Portfolio Manager of Impax’s Specialists and Climate strategies.

Bruce joined Impax in 1999 where he worked initially on venture capital investments before developing the listed equities business.  Before joining Impax, Bruce worked as a utilities analyst at Bankers Trust and as an environmental consultant for Environmental Resources Management (ERM).

Bruce has an MBA from IESE (Barcelona), an MSc in Environmental Technology from Imperial College and a degree in Chemistry from Oxford.

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Hubert Aarts

Deputy CIO, Listed Equities, Executive Director

Hubert serves as Deputy CIO, Listed Equities. He and Bruce Jenkyn-Jones, CIO Listed Equities, are responsible for the development of the investment process, research and team. Hubert researches stocks globally and specialises in Industrials and Consumer Discretionary.

Hubert is Co-Portfolio Manager of Impax’s Leaders and Water strategies. He also leads Impax’s macro-economic research process and is responsible for the top-down investment framework.

Hubert started his career in the investment industry in 1990 and joined Impax in January 2007.  He has extensive experience investing in Pan-European equities as a portfolio manager at MeesPierson and Merrill Lynch Investment Managers, where he chaired the European Sector Strategy Group. Hubert joined Impax from Cambrian Capital Partners LLP where he was a partner and portfolio manager of the Curalium Fund and Incremental Leveraged hedge funds.

Hubert has a Master’s degree in Economics and Business Administration from Maastricht University.

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Chris Dodwell

Head of Policy and Advocacy

Chris is a climate change and environmental policy expert with over 25 years’ public and private sector experience. He is responsible for managing Impax’s engagement in the development of policy issues and providing insights on policy to the firm’s investment teams.

Before joining Impax in 2019 Chris worked at Ricardo Energy & Environment for eight years as Director of Climate Change, Clean Growth and Strategic Partnerships. Here he was responsible for overseeing key projects in the aforementioned areas as well as building relationships with clients in the public and financial services sectors. Prior to this he worked for 10 years at the heart of the UK Government’s work on climate change, including leading the UK’s implementation of the EU Emissions Trading System and heading the UK Delegation to the United Nations Framework Convention on Climate Change (UNFCCC). Chris began his career as a solicitor at Freshfields Bruckhaus Deringer where he worked on a variety of civil, criminal and public law litigation relating to the impact of pollution on the environment and human health.

Chris graduated with a BA Hons in Classics from the University of Cambridge in 1990 and later went on to achieve a Master of Laws in Environmental Law from University College London in 2002.

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Julie Gorte, Ph.D.

Senior Vice President for Sustainable Investing

Julie Gorte is Senior Vice President for Sustainable Investing at Impax Asset Management LLC, the North American division of Impax Asset Management Group and investment adviser to Pax World Funds.

She oversees environmental, social and governance-related research on prospective and current investments as well as the firm’s shareholder engagement and public policy advocacy. Julie is also a member of the Impax Gender Analytics team.

Prior to joining the firm, Julie served as Vice President and Chief Social Investment Strategist at Calvert. Her experience before she joined the investment world in 1999 includes a various number of roles. Julie spent nearly 14 years as Senior Associate and Project Director at the Congressional Office of Technology Assessment. Additionally, she has held the roles of Vice President for Economic and Environmental Research at The Wilderness Society, and Program Manager for Technology Programs in the Environmental Protection Agency’s policy office and Senior Associate at the Northeast-Midwest Institute.

Julie serves on the boards of the Endangered Species Coalition, E4theFuture, Clean Production Action and is the board chair of the Sustainable Investments Institute.

Julie received a Ph.D. and Master of Science in resource economics from Michigan State University and a Bachelor of Science in forest management at Northern Arizona University.

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Joseph Keefe

President

Joe is President of Impax Asset Management LLC, the North American division of Impax Asset Management Group and investment adviser to Pax World Funds. Based in the Portsmouth office, he is responsible for US managed strategies as well as distribution of Impax’s full capabilities across North America.

Prior to joining the firm in May 2005, Joe was President of NewCircle Communications, a strategic consulting and communications firm specializing in corporate social responsibility and public policy communications. He served as Senior Advisor for Strategic Social Policy at Calvert Group from 2003-2005 and as Executive Vice President and General Counsel of Citizens Advisers from 1997-2000. He is a former member of the Board of Directors (2000-2006) of US SIF, the trade association representing asset managers and investors engaged in sustainable investing throughout the United States. Before entering the investment management industry, Joe worked in private law practice for 16 years.

Joe holds a Juris Doctor from the University of Virginia School of Law and a Bachelor of Arts in philosophy from the College of the Holy Cross.

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Kirsteen Morrison

Senior Portfolio Manager

Kirsteen co-manages the Global Opportunities strategy with David Winborne. She specializes in the Energy Efficiency environmental sub-sector and researches stocks globally with a focus on Financials. Kirsteen is a member of the Portfolio Construction team for the Asian Environmental Markets Strategy.

Kirsteen joined Impax in September 2009. She began her career in the investment industry in 1987, investing in Asian equities as a portfolio manager at Royal London and Henderson Global Investors. She returned from Singapore in 2001 to head the SRI Investment team at Henderson Global Investors in London. Subsequently, Kirsteen worked within global equities, as a Financial analyst for Odey Asset Management before joining JP Morgan to run a long/short Financials portfolio for the internal hedge fund.
Kirsteen has an MA in Metallurgy and Science of Materials from Oxford.

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Oscar Yang

Portfolio Manager

Oscar is Senior Portfolio Manager and co-manages the Asian Environmental Markets Strategy and Asian Opportunities Strategy with David Li. He has broad expertise in the environmental markets sub-sectors and research responsibility covering the entire universe with a focus on the Asia-Pacific region.

Oscar joined Impax in 2011 as an analyst focusing on Asia-Pacific research. He began his career in the financial industry and environmental markets in 2007, previously working at Origo Partners as an investment associate and assistant fund manager, and prior to that at Midas Holdings.

Oscar has an MSc from the London School of Economics.

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