Fewer than four months ago, the world was digesting the results of the COP26 Climate Conference, with widespread commentary that we were both heading for a more sustainable economy and at the dawn of a new industrial revolution based on clean technologies. Yet, since the start of 2022, equity markets have fallen amid concerns about inflation, the end of quantitative easing and rising interest rates.

Russia’s invasion of Ukraine has rattled global market sentiment, with investors worried about the wider implications of the conflict. The share prices of companies at the vanguard of the sustainable economy have suffered more than most — for example, the FTSE Environmental Opportunities All-Share Index dropped 11% between January 1 and February 28, 2022, while the MSCI ACWI Index fell by only 8%.1 What’s going on?

It’s no surprise that rising generic risk indicators have triggered a rotation away from “growth” to “value”-oriented stocks and sectors, as weaker consumer sentiment and spending power are expected to impact corporate earnings, particularly in discretionary areas. And with political instability on Europe’s eastern borders and the possibility of severe disruption to natural gas markets, it is likely that many investment decisions will be delayed.

But what’s the read across to the sustainable economy? For investors taking a medium-term or longer perspective, there seems little reason to discount the statements made by governments, major corporates and financial institutions that investment in renewable power generation, zero-emissions transportation and resource efficiency will continue to grow, taking market share from legacy sectors. For example, G7 countries and the EU have committed to largely decarbonize their electricity sectors during the 2030s,2 while policy commitments to ban the sale of passenger vehicles with internal combustion engines (ICEs) have prompted several high-profile vehicle manufacturers, including Ford and General Motors, to sunset the manufacturing of ICE vehicles worldwide.3

“It is likely that initiatives to launch a global hydrogen economy will also be fast-tracked, providing an attractive solution for the challenges of decarbonizing heat as well as some transportation fuels.”

         —Ian Simm

The crisis in Ukraine is likely to further strengthen these drivers. Once the political situation stabilizes, European governments in particular will surely seek to reduce urgently their dependence on Russian gas, which accounts for 38% of EU gas imports and provides the majority of the energy used for heat in several countries. As for Russia itself, it is clear that the world’s largest gas exporter and second-largest oil exporter needs to secure its future prosperity as fossil fuel demand wanes.4 A vision for a prosperous, low-carbon Russia must be developed to help ensure a peaceful transition.

Among gas importers, we can expect heightened concerns about energy dependency to combine with additional doubts about the resilience of longer supply chains, as illustrated by the six-day blockage in 2021 of the Suez Canal, to drive further calls for accelerated investment in domestic renewable energy generation.

With a longer-term perspective, it’s likely that initiatives to launch a global hydrogen economy will also be fast-tracked, providing an attractive solution for the challenges of decarbonizing heat as well as some transportation fuels, for example, in the marine sector. Today, almost all the hydrogen we consume is sourced from natural gas; however, the rapid drop in the cost of electrolysis is making zero-carbon (or “green”) hydrogen a commercial reality, and public-private partnerships to establish industrial clusters using hydrogen-based energy offer a route to establishing scale in this nascent sector. Watch out for an uptick in the pace of announcements in this area.

Outside the energy sector, we’re still expecting that resource efficiency, climate resilience and ecosystem protection will become major themes guiding capital expenditure. For example, the first part of the US post-COVID stimulus plan includes US$213 billion to make buildings and homes more energy efficient, while 30% of the €750 billion EU Recovery Plan will target initiatives to address climate change.5 In parallel, the emergence of mandatory “sustainable finance” disclosure requirements on fund managers plus governments’ adoption of green taxonomies is likely to raise the attractiveness of investments that are consistent with a more sustainable economy, thereby reducing the cost of capital for eligible companies.

Experience from previous periods of market volatility reminds us that trying to “catch the falling knife” by rushing into the market is usually unwise. However, after more than half a decade of relative market calm and often eye-watering valuations, investors with capital to deploy may look back on the early part of this year as a great buying opportunity. It’s too early to conclude that we’ve reached the apocryphal point of “capitulation,” when almost all the investors minded to throw in the towel have done so. However, when that time comes, those companies whose business plans are resonant with a more sustainable economy, with low leverage and pricing power, should offer compelling opportunities.

This article was first published in Citywire.

1 FTSE Russell, MSCI. Index returns in US dollars.

2 Statement by the G7 Presidency of the UK Net-Zero Power: Commitment to Action, October 20, 2021

3 COP26 declaration on accelerating the transition to 100% zero emission cars and vans, November 10, 2021

4 IEA, February 2022

5 White House, European Commission

Ian Simm

Founder & CEO

Ian Simm is the Founder and Chief Executive of Impax Asset Management Group plc, one of the world’s leading investment managers dedicated to investing in the transition to a more sustainable economy. Prior to Impax, Ian was an engagement manager at McKinsey & Company advising clients on environmental strategy.

Outside Impax, Ian is a member of the UK government’s Net Zero Innovation Board, which provides strategic oversight of public sector funding of energy innovation programmes and is a board member of the Institutional Investors Group on Climate Change, the European membership body for investor collaboration on addressing climate change. He is also a commissioner with the Energy Transitions Commission, a global coalition of leaders developing transition roadmaps to achieve net-zero emissions. Between 2013 and 2018, he was a board member of the Natural Environment Research Council (NERC), the UK’s leading funding agency for environmental science. He supports charities in the clean energy, healthcare and a range of scientific and environmental sectors.

Ian has a first-class honours degree in physics from Cambridge University and a Master’s in Public Administration from Harvard University. In the last century he initiated and led an expedition to complete the first summer crossing of the Sahara Desert by tandem bicycle.

Recent Insights

Additional Insights

Scroll to top
To get started, please select your location and investor type below.

If you are invested in Impax Funds – regardless of share class (Investor, Institutional, or Class A) or account type (individual, business or other entity) please select Impax Funds Investor as your Investor Type.

Access Impax Asset Management Limited’s Form CRS here.

Important Information

I confirm that I am an [investor_type] based in [investor_country] and that I have read and understood the important information, privacy policy and terms and conditions which govern the use of this website.

Risk Warning

Capital at risk. The value of investments may go up or down and is not guaranteed.