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Foster Denovo|News & blogs|Opinion|Market Briefing (no.46) – 6th June 2022

Market Briefing (no.46) – 6th June 2022

ESG investing falls – what should you be thinking?

It goes without saying that it has been a challenging period for those invested in Environmental, Social and Governance (ESG)  funds and portfolios since December last year, as shown (graph 1).

Although it is tempting to ‘blame’ ESG investments, a wider analysis of the root causes will provide more accuracy and subsequently a better understanding.

The reason for the recent drawdowns seen in ESG investments has been the dramatic investment philosophy rotation – or change – from the Growth philosophy to Value (graph 2).

The impact has been felt more greatly in ESG investments as, in the main, ESG investments sit within the Growth philosophy.

This rapid change, mainly driven by sentiment, was due to a surge in inflation, which in the UK reached its highest level since 1991 (graph 3). This in turn has fed fears of more interest rate rises which has disproportionately hurt long term assets such as Growth equities (or shares).

The speed of this rotation and inflation increases have also been spurred on by a far more serious event on 24th February which hit markets.

Just over 100 days ago, Putin’s Russia launched what is the largest military attack in Europe since the Second World War when he invaded Ukraine. Albeit generally short-term, war always impacts the confidence of markets; this time has been no different.

What should this tell you?

It is normal to get preoccupied by the current spate of news headlines when investment portfolios fall in value in the short term. And clearly during the last few months there have been many such headlines, ranging from anxiety about inflation to the grave news from Ukraine.

As a result, many active managers within ESG investing have confirmed the potential impact on their underlying holdings in view of what we’ve discussed above, but are reassured in their medium to long term views.

Why is this?

Many of the companies they invest in, either have, or anticipate posting positive trading updates, and in some cases are ahead of expectations. The drawdown has allowed the fund managers to invest in and add to companies whose valuations have fallen due to the aforementioned negative sentiment, rather than a worsening in the quality or prospects of the underlying fundamentals. As a result, the arguments for ESG investing have strengthened. One reason for this is the Ukraine war has motivated countries with an over-dependency on non-domestic energy supplies to look for alternatives such as renewable energy, greater energy efficiency and more sustainable options.

It is also worth remembering that there is a brief time opportunity to limit the effects of climate change which when combined with the search for alternatives will significantly include renewable sources of energy. Companies in this area will benefit from this focus irrespective of the short termism which is impacting financial markets currently.

ESG investing falls – what should you be thinking?

For those invested in ESG funds and portfolios, the short term may remain challenging but the medium to long term may be a different story as perhaps the example of domestic renewable energy suggests. ‘Zooming out’ to view matters over the longer term therefore is even more essential now.

As we have said many times before, we will continue to monitor the current financial situation and keep you notified of any significant changes that are made. Please contact your Foster Denovo Partner if you wish to discuss your financial situation further.

This week in history…

1st June 1935: Compulsory driving tests and licence plates introduced in the United Kingdom

2nd June 1953: Coronation of Queen Elizabeth II in Westminster Abbey, London

3rd June 1940: Beginning of the Tiananmen Square Massacre as Chinese troops open fire on pro-democracy supporters in Beijing

4th June 1940: British complete the “Miracle of Dunkirk” by evacuating 338,226 allied troops from France via a flotilla of over 800 vessels including Royal Navy destroyers, merchant marine boats, fishing boats, pleasure craft and even lifeboats

5th June 1963: British Minister of War John Profumo resigns due to Christine Keeler scandal

6th June 1944 Operation Overlord: D-Day begins as the 156,000-strong Allied Expeditionary Force lands in Normandy, France, during Second World War

7th June 1975: Sony introduces the Betamax videocassette recorder for sale to the public

8th June 1812: Robert Jenkinson becomes Prime Minister after Spencer Perceval’s assassination

9th June 1975: House of Commons is broadcast live by radio for first time

10th June 1857: Britain passes an act putting Canada on the decimal currency system

Sources

This publication is marketing material. It is for information purposes only. This statement is for the sole use of the recipient to whom it has been directly delivered by their Foster Denovo Partner and should not be reproduced, copied or made available to others. The information presented herein is for illustrative purposes only and does not provide sufficient information on which to make an informed investment decision. This document is not intended and should not be construed as an offer, solicitation or recommendation to buy or sell any specific investments or participate in any investment (or other) strategy. Potential investors will have sought advice concerning the suitability of any investment from their Foster Denovo Partner. Potential investors should be aware that past performance is not an indication of future performance and the value of investments and the income derived from them may fluctuate and they may not receive back the amount they originally invested. The tax treatment of investments depends on each investor’s individual circumstances and is subject to changes in tax legislation.
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