ESG’s inflation conundrum

After years of momentum for ESG investing, geopolitics and inflation have thrown a wrench in the shift toward cleaner energy.

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“Inflation has affected all areas of the economy, and ESG investing has not been immune,” said Aaron White, vice-president of sustainable investments with CIBC Asset Management.

Energy shortages and the rising price of gas and electricity have forced countries to reconsider emission reduction plans and focus instead on inflation, White said, with some countries even recommissioning old coal plants.

Despite the push-back, however, he believes these headwinds are short-term. 

“Concentrating the bulk of investment into low-carbon energy solutions should provide the world with significantly better outcomes over the long term,” he said.

Why?

First, more investment in technology to support the energy transition will bring costs down. “We’re already seeing significantly lower costs in more traditional renewable sources like solar and wind,” White said, and investment in more complicated sectors — such as steel, cement, heavy goods vehicles and shipping — have increased.  

Second, he said governments will increasingly push the cost of fossil fuels onto end users to meet net-zero commitments by 2050. The Canadian government has already said it will increase carbon taxes to $170 a tonne, and White said he expects others to follow.

Third, geopolitical events have reinforced the need for investment in alternative energy sources. This will not only reduce the cost, White said, but will contribute to energy security as countries reduce their reliance on oil.

Accordingly, White said investing in the climate transition will address both energy security and inflation over the long term, while also benefiting the environment.

“Despite some short-term headwinds in the energy transition, the costs of inaction are far greater,” he said. 

White said investors should also consider their own role in driving inflation through the companies they own. A number of economists have cited corporate profits as a key driver of inflation, he said, and management teams beholden to shareholders are incentivized to pass on higher costs to consumers. 

“In an environment where energy costs and environmental impacts dominate the conversation of ESG, it’s important not to lose sight of the social considerations and how we as investors contribute both positively and negatively by enabling the companies with which we invest,” said White. 

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Maddie Johnson

Maddie is a freelance writer and editor who has been reporting for Advisor.ca since 2019.