Inflation driven by new green policies will increase these stocks: Strategy

Delegates walk past a screen during the United Nations Climate Change Conference (COP26) in Glasgow, Scotland, UK, on ​​1 November 2021.

Yves Herman | Reuters

Inflationary pressures arising from governments ‘and corporations’ efforts to pursue net-zero initiatives will extend far beyond energy prices, according to Seema Shah, chief strategist at Principal Global Investors.

The risk of “green inflation”[ads1]; – increases in energy prices and consumer costs triggered by global efforts to transition to green energy – is well documented.

However, in a new research note alongside the COP26 climate conference and seen by CNBC, Shah argued that “the rapidly changing way companies across all sectors are taking environmental considerations into account in their business models – and the rising costs of doing so – is potentially still underestimated by some investors. “

She highlighted four different factors that will contribute to upward pressure on the costs of running more environmentally friendly businesses, called environmental inflation or “en-inflation”.

The EU quota trading system requires manufacturers, power companies and airlines to pay for every tonne of carbon dioxide they emit. However, the block provides free carbon licenses to some industries to enable them to compete with large international companies that are not subject to carbon “taxes”.

These will be phased out for large emissions industries from 2026, while the EU will also cut the number of permits for other sectors. EU-listed steelmakers could lose 60% of profits if forced to pay to offset the emissions currently allowed under the EU ETS, according to asset manager Lazard.

In addition, recent research from University College London earlier this year estimated up to a 10-fold increase in carbon offset costs by 2030, as demand increases exponentially as profit supply declines.

Tougher climate punishment

Second, Shah said it was reasonable to expect that the penalties would be stricter for companies that fail to meet UN climate goals.

MSCI Net Zero Tracker, which analyzes the collective progress of listed companies towards climate targets, recently found that these companies are on track to cause a global temperature increase of 3 ° C (well above the 1.5 ° C temperature increase agreed in Paris in 2015)) and that many still fail to disclose important information about emissions, “Shah emphasized.

In May, Royal Dutch Shell became the first company legally ordered to adapt its guidelines to the Paris Agreement after the Hague District Court ruled that the major oil company must reduce its carbon emissions by 45% by 2030.

“With the environmental commitments of the authorities themselves under increased scrutiny to achieve the Paris goals, it is probably not long before decision-makers and regulators look to implement stricter penalties,” Shah said.

A third source of upward pressure is talent, with all sectors participating in the search for employees with “green” skills, but Shah noted that this will also take a toll on companies’ bottom lines.

She pointed to a recent modeling from the British work think tank Onward, which found that new jobs created to advance net-zero ambitions have on average a salary that is 18% higher than the national average in the UK

The UK registered 1.1 million job vacancies in the three months to August, a 40-year high, while unemployment fell to 4.5%, indicating a significantly tighter labor market, while the government has promised 440,000 well-paid greens jobs by 2030.

Companies will have to fill these to achieve national goals, and to hire skilled workers to ensure high quality data and sustainability reporting.

“Finally, it is natural that as business models adapt to become greener, investment in technology and R & D spending will increase across the board,” Shah said.

“Constant innovation will be needed and the cost of doing business in a climate-conscious world will rise.”

How can investors capitalize?

Shah advised investors to support financial franchise rates to cope with the “one-inflationary” environment, companies that can “flex prices instead of bearing the increased costs themselves.”

“Luxury retailers, for example, can adjust prices higher without sacrificing customers significantly,” she added.

“Companies with deep moats have greater pricing power and can use this to protect profit margins without risking losing market share to rivals.”

Modern bond authorizations such as FAANGs (Facebook, Amazon, Apple, Netflix, Google) are also tipped to give good results due to their relative stability, while traditional bond authorizations as tools can struggle due to energy price increases.

Geographically, Shah supports the United States across Europe because of its superior ability to cope with the shock of inflation from higher energy costs.

“The United States is self-sufficient in energy, and consumers have significant surplus savings to absorb higher prices,” she said.

“On the other hand, as a major net importer of energy, Europe is more exposed. Another factor that is likely to cause US equities to outperform Europe in the coming months.”

Finally, Principal forecasts growth stocks to exceed value, with larger capital expenditures affecting income investors who may see dividends dampened by the green transition.

“Increasing spending on innovation means less money on the balance of payments. As companies take steps to greener their business models, investors may see more opportunities from growth than traditional revenue sectors,” Shah said.

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