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From growth to value: where to look in ESG?

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This is a sponsored article from Schroders.

Chloe Shea, Investment Director, Multi-Asset

Since the beginning of 2022, financial markets have been experiencing heightened volatility against a backdrop of rising interest rates, inflation and peaking economic growth. As of end-July 2022, the MSCI All-Country World Equity Index fell 15.5%, with the Bloomberg Barclays Global Aggregate Bond Index down 2.7%.

While persistent supply-chain bottlenecks and the Russia-Ukraine conflict are not helping to ease inflationary pressures, we believe themes that can withstand these headwinds are likely to gain traction.

Some quality companies are presenting interesting opportunities for investors after the global equity and bond sell-off . Investors taking a thematic approach may find themselves inspired by structural trends, and are looking beyond traditional geographies and sectors for opportunities.

Characteristics in potential winners

In the near term, market volatility and uncertainties are likely going to continue. However, some investments can generate a return and, more importantly, have a positive impact on the environment. Investors may discover these hidden gems by focusing on companies that are (1) attractively valued, (2) relatively resilient, and (3) can combat inflation.

We believe that ESG-related themes, such as “sustainable food and water” and “energy transition”, possess all these characteristics, making them worthwhile to watch in the coming months and years.

Why “sustainable food and water” in today’s world?

ESG has been a crucial investment theme for some time, and food and water has been one core component. Food production accounts for around 25% of global greenhouse gas emissions and 65% of freshwater usage, according to UN data. It also accounts for approximately 60% of the two billion tonnes of waste produced globally each year, directly or indirectly.

As discussed by my Global Resource Equities colleagues Mark Lacey and Felix Odey, it is estimated that US$30 trillion needs to be spent across the different food and water value chains by 2050 to make our current system sustainable. This imperative creates the potential for new sources of growth in companies from mature sectors that many investors may have written off as old economy.

Nordic seafood companies, for example, have demonstrated their tenacity in today’s unprecedently challenging environment. Despite supply chain disruptions stemming from geopolitical concerns, these stocks continued to surge as investors shifted from growth to value in 2022.

Additionally, consumers care more and more about whether or not food producers and stores are sustainable.

As consumers become increasingly aware of their impact on the environment, the likes of bamboo straws and paper takeaway boxes have become more and more common in our day-to-day food purchases, while single-use plastic is becoming less so. This is creating a huge demand for companies that focus on sustainable food packaging.

The food packaging industry is expected to grow from US$338.3 billion in 2021 to US$478.1 billion in 20281. Looking at the sector’s performance in 2022, some leading companies have performed extremely well. We believe those that are able to address sustainability-related issues are more likely to ride on future growth.

What about “energy transition”?

We are also closely watching the energy transition investment theme.

The sharp rise in gas prices in the aftermath of the Russia-Ukraine conflict and the relatively lower cost of other viable power sources has made renewable energy even more attractive to end-users and investors. Investors recognise the need for vigorous action to mitigate the risk of climate change, so immense opportunities can emerge from across the green value chain.

Find out more about Schroders’ insights and capabilities on sustainable investing here.
 


1https://www.fortunebusinessinsights.com/industry-reports/food-packaging-market-101941

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