Sticking with sustainability 2022 has been a very challenging year for all investors, Despite these near-term difficulties, we see many but there have arguably been additional headwinds for reasons why it would be a mistake for investors to shy those with a sustainable tilt. The strong performance away from reflecting sustainability considerations in of oil and gas companies has led many sustainably portfolios. tilted strategies – particularly those that apply blanket In Europe, the energy crisis has forced governments exclusion policies – to underperform benchmarks, while to prioritise energy security in the short term, with coal the growth tilt of renewable technology stocks has also demand set to reach new record highs in 2022, and oil been problematic in a year where surging bond yields and gas companies delivering strong profits growth as prompted a broad-based growth sell off. prices surged. Yet these events must not obscure the A closer look under the surface of the equity market bigger picture. To reduce dependency on Russian fuel helps to track how sentiment has ebbed and flowed. while also meeting climate objectives, Europe needs to Fossil fuel companies have been the major beneficiary reshape how it sources and uses energy, and fast. of high commodity prices, outperforming global An accelerated rollout of lower priced renewable stocks by more than 50% in the first 10 months of projects is the only medium-term solution, with 2022. Sustainably focused strategies that tilt away associated earnings tailwinds for energy companies from the traditional energy sector are therefore likely that can scale up their renewable capacity. Clean laggards. Performance across the broader renewable energy investment is accelerating in response, with energy sector has been more nuanced, with a sharp the International Energy Agency expecting at least sell-off at the start of the year as bond yields rose USD 1.4 trillion in new investment in 2022 and the followed by a turnaround that began with the Russia- sector now accounting for almost three quarters of Ukraine war. Strategies linked to hydrogen stocks have the growth in overall energy investment. The European suffered much more, with several of the most popular Union’s (EU’s) REPowerEU plan allocates nearly EUR funds down more than 40% from January to October 300 billion in investment by 2030 to help reduce the 2022 given their acute sensitivity to rising bond yields bloc’s dependence on Russian fossil fuels. The US is (Exhibit 17). also joining the party, with the Inflation Reduction Act including tax credits and other financial incentives Exhibit 17: Performance has varied widely across the energy aimed at making clean energy more accessible. spectrum this year Fears around windfall taxes – not just for energy Energy sector performance in 2022 companies but also for electricity providers – may Index level, rebased to 100 in January 2022 be one reason why this earnings optimism has not 150 been fully reflected in prices so far. Clearly it is not 140 socially acceptable to allow utility companies to reap 130 large windfall profits from surging electricity prices in 120 the midst of a cost-of-living crisis. Yet given the need 110 for governments to encourage investment as part of 100 the energy transition, we would expect any impact of 90 windfall taxes on renewable providers to be far less than 80 for traditional energy companies. If the marginal cost 70 of electricity is eventually de-linked from the natural 60 gas price – as the EU and UK are examining – then 50 renewables providers would probably fall out of scope Jan '22 Mar '22 May '22 Jul '22 Sep '22 Nov '22 of such taxes too. Traditional energy lternative energy ydrogen energy Source: MSCI, Refinitiv Datastream, J.P. Morgan Asset Management. Alternative energy is the MSCI Global Alternative Energy index, traditional energy is the MSCI ACWI Energy index and hydrogen is a custom-built, equally weighted index of five hydrogen focused ETFs. Past performance is not a reliable indicator of current and future results. Data as of 31 October 2022. 14 A bad year for the economy, a better year for markets