Here we are at the start of 2021, happy to leave behind 2020 and to perhaps commit to our new year’s resolutions. My resolution is to “go greener” but I do not mean “eat more salads”, (even though my colleagues might advise me to). I will only eat more salads in 2021 if they are in season, as eating out of season can create a lot of carbon, never mind the carbon footprint of a steak!
Even though 2020 was a very tough year for everyone and more so for some, there are some interesting lessons to learn from the year that was. During a one in a hundred-year pandemic, the world’s population was forced to stay at home and the stock market behaved bizarrely. Since the late 1800s, there have been 27 bear markets with an average decline of 38%. Every bear market has taken at least five years to reach new heights, in 2020 we did it in five months. Never has the world seen such a quick response by central banks and the market was flooded with cheap money.
Because of the pandemic, our day to day lives have become very futuristic. From home working, socialising on Zoom and Instagram gym classes, it seems we live our lives online. Another thing that has been propelled into the future is sustainability investing. The area of ESG (Environmental, Social, Governance) has seen a sharp rise in demand in recent years with climate change driving a significant part of the overall agenda for investors. In the United States, ESG funds experienced inflows of $45.7 billion in Q1 2020. ESG investing has now become mainstream.
In 2020, carbon dioxide emissions grew the least amount in 30 years as a result of lockdowns. Big oil received a lump of coal for Christmas to round off its worst year ever. Political turmoil and a pandemic collapsed crude prices and destroyed dividend records, from $61.63 a barrel in January 2020 to $21.04 in April. Shell, Total and BP have belatedly presented pathways to transition away from fossil fuels. Clean energy, by contrast, is proving to be a very profitable sector for investors. In a year when oil and gas investments lost a quarter of value, the S&P Clean Energy index has more than doubled.
Developments in solar power have been radical, and seem to have passed by many investors. Buying solar energy stocks last year worked out very well. Despite concern over climate change, they had been in the doldrums almost without a break since 2007. What makes the current rally more remarkable is that it has co-existed with a fall in oil prices. Generally, solar stocks need higher oil prices, as this sharpens the incentives to find an alternative. A rally while oil prices are low is suggesting genuine optimism about the solar industry.
Even with protectionism creeping in and less global trade, another positive for us living on the Emerald Isle is that we saw the European Union grow stronger and more unified despite Brexit struggles. The EU’s long-term budget, along with Next Generation EU, the temporary instrument designed to boost the recovery, is the largest stimulus package ever financed through the EU. A total of €1.8 trillion will help rebuild a post-COVID-19 Europe. The package also commits to fighting climate change with 30% of the EU funds, the highest share ever of the European budget. The co-ordinated response from the EU points towards a more resilient and greener Europe
US president-elect Joe Biden has outlined a USD 1.9 trillion climate spending plan to be implemented. The plan has the ambitious aim of achieving 100% clean electricity by 2035 and net-zero emissions by 2050. Biden will recommit the United States to the Paris Agreement and integrate climate change into US foreign policy and approach to trade.
It is estimated that $44 trillion of economic value generation in the world is dependent on nature. A recommitment to fighting climate change from world governments is not just a must have, it is urgently needed.
We did have some cause for celebration in 2020, our Green Effects Fund was +42.74 % for the year and was central to an ESG and Sustainability Investing webinar we held in November, as we celebrated the 20th anniversary of the fund. The Green Effects Fund was originally set up as a response to the demand for a more ethical and socially responsible investment approach for clients who wanted to make a difference with their investment portfolios.
The stocks are taken from the Natural Stock Index (NAI) index which is listed in Germany. The constituents within this index provide the investment universe for the fund and are the only stocks in which it can invest. The index was established in 1997 with an initial list of ten stocks and has now grown to 30 constituent members.
The NAI index criteria employ both a negative and positive screening bias within its selection methodology. A wide range of companies with a commitment to either supporting the environment or demonstrating a strong corporate responsibility ethos are represented. Sectors such as wind energy, recycling, waste management, forestry and water-related business all feature prominently. Negative screening ensures that companies are excluded from the index should they be involved in sectors of industry employing unethical practices. 75% of the companies listed have an annual turnover of more than $100 million.
Going into to 2021 we are encouraging our clients to go greener and invest today to secure tomorrow. Green salads remain optional.
JP Maguire is a Senior Portfolio Manager at Cantor Fitzgerald Ireland.
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Warning: Past performance is not a reliable guide to future performance. The value of your investment may go down as well as up.