4 June 2022
The events of the year so far may force a re-think for investors focussed on ESG (environmental, social, and governance) issues, according to Brewin Dolphin, as Russia’s invasion of Ukraine and an inflation rate not seen in decades jolt stock markets.
The wealth manager said that, while more ESG minded investors had enjoyed several years of outperformance, the beginning of 2022 has proved much more challenging, with many of the factors that had provided a boost to ESG funds reversing sharply.
Oil prices have hit highs last seen in 2008 – some analysts forecast greater rises ahead – while a number of countries have pledged to raise their spending on defence, including Germany, in a major shift on recent policy, committing €100 billion to a fund for its armed services.
Brewin Dolphin said that the first couple of months of this year are a reminder to investors that ESG strategies are not the ‘risk-free’ approaches they may have appeared to be in recent years.
Rob Burgeman, senior investment manager at Brewin Dolphin, said: “ESG investors must be feeling pretty green in 2022. For several years, focussing on sustainability over other strategies has not generally had a negative impact on investment returns, especially relative to global benchmarks. However, some of the profound changes we are seeing as a result of the events of the past couple of months are likely to change this over the years ahead.
“Of course, there is nothing wrong with being ethically inclined, and investors should have their own moral compasses governing their approach. It is, however, likely to be more challenging from this point on.
“It is important to bear in mind there is a spectrum for ESG: from ‘responsible’ at one end to ‘dark green’ sustainable investment at the other, with a lot of options and variables in the middle. These tend to be influenced by each individual’s values, performance requirements, or desire to invest positively to shape the world. It is a very complex area, which is why we would always recommend taking professional advice when it comes to choosing an ESG strategy that suits your financial objectives.
“None of this is to suggest in any way that being socially or ethically responsible is the wrong thing to do. The drivers behind some of the changes we are seeing that initially buoyed ESG strategies are not going to go away. Yet, some of the headwinds faced by companies that one would not normally find in an ESG or a more traditional ‘green’ fund could well turn into tailwinds – and that is likely to force a re-think for investors looking to keep pace with markets, while also having a clean conscience.”
Energy
The SPDR MSCI World Energy ETF – a basket of major companies involved in the energy industry – is up more than +47% in sterling terms in the last six months (see performance table below). Over the same period, the iShares Global Clean Energy ETF has delivered a negative return of around -10% – although, this has begun to rebound from a period of underperformance. These figures compare with a fall of -1.97% in the MSCI World Index over the same period.
Rob said: “While the drivers for the world becoming a greener place are not going to change, a structurally higher oil price driven by an increase in geopolitical risk is also likely for the foreseeable future. Energy is undoubtedly going through a shift: in the long term, the world was heading for more renewable sources of energy and the war will only reinforce the move away from oil and gas to renewables over time. However, in the short term, progress against net zero goals may well slow as Europe looks for alternatives to Russian oil and gas.
“Resource stocks, too, are having their time in the spotlight as we all learn just how much the global economy relies on the output from Ukraine and Russia – wheat, titanium, aluminium, and fertiliser to name just a few. The VanEck Global Mining ETF – a basket of global miners with holdings in BHP, Rio Tinto, Vale and Freeport-McMoran amongst others – has risen by +16% over the last six months.”
Defence
Another area that is likely to see a considerable change in outlook is the defence sector. A heightening of risk has already seen Germany declare that it will spend more on boosting its armed forces in reaction to the considerable deterioration in political stability across Europe. Others look likely to follow this example.
Rob said: “The importance of defence has been sharply underlined in recent weeks and the implication could be a re-evaluation of how defence is considered in terms of sustainable investment. The ETF industry in the UK has been quick to pick up on the cyber security sector, but has not yet launched a defence spending-based ETF – it is only a matter of time before that changes.
“In the meantime, UK-based BAE Systems, French manufacturer of the Mirage jet Thales, or Italian helicopter builder Leonardo are key European players. Further afield, Raytheon Technologies, Lockheed Martin, and L3Harris Technologies are major US companies involved in the sector.”
Financials
With inflation at 30-year highs, a series of interest rates rises have been scheduled in by central banks in the world’s major economies – albeit, whether the situation in Ukraine influences this remains to be seen. The financial sector, not typically considered an ESG-friendly area to invest, is also expected to be affected by the imposition of sanctions on Russia and wealthy individuals within the country.
Rob said: “The rising interest rate environment has been a potential boon to the banking and wider finance sectors, which tend to be major beneficiaries of these rises. The SPDR World Financials ETF is just over 50% invested in the US and just under 50% invested in banks, with the balance spread globally in a geographic sense and includes insurance and diversified financials sectors amongst others.
“In the UK, Barclays looks the strongest of the major banks for its global offering, while Lloyds could interest those who prefer a more domestic focus in the banking sector. Legal & General in the wider sector offers exposure to insurance, property, and a broad set of financial products, with an attractive dividend yield of more than 7%.”
Five year total returns:
(1) 5 years to 11/3/22
(*) from 23/4/18
– ENDS –
Disclaimers
The value of investments can fall and you may get back less than you invested., Neither simulated nor actual past performance are reliable indicators of future performance. Performance is quoted before charges which will reduce illustrated performance., Investment values may increase or decrease as a result of currency fluctuations., Information is provided only as an example and is not a recommendation to pursue a particular strategy., We or a connected person may have positions in or options on the securities mentioned herein or may buy, sell or offer to make a purchase or sale of such securities from time to time. In addition we reserve the right to act as principal or agent with regard to the sale or purchase of any security mentioned in this document. For further information, please refer to our conflicts policy which is available on request or can be accessed via our website at www.brewin.co.uk., Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness., We will only be bound by specific investment restrictions which have been requested by you and agreed by us; Brewin Dolphin is authorised and regulated by the FCA (Financial Services Register reference number 124444)
PRESS INFORMATION
For further information, please contact:
Peter McFarlane peter.mcfarlane@framecreates.co.uk / Tel: 07412 739 093
Richard Janes richard.janes@brewin.co.uk / Tel: +44 (0) 20 3201 3343
Siân Robertson: Sian.Robertson@brewin.co.uk / Tel: (0) 20 3201 3026
Payal Nair payal.nair@brewin.co.uk / Tel: +44 (0) 20 3201 3342
NOTES TO EDITORS
About Brewin Dolphin
Brewin Dolphin is a UK FTSE 250 provider of discretionary wealth management. With £59.0* billion in total funds, we offer award-winning, personalised wealth management services that meet the varied needs of our clients including individuals, charities and corporates.
Our services range from bespoke, discretionary investment management to retirement planning and tax-efficient investing. Our focus on discretionary investment management has led to significant growth in client funds and we now manage £52.0* billion on a discretionary basis.
Our intermediary business manages £19.0* billion of assets for over 1,700 advice firms either on a discretionary basis or via our Managed Portfolio Service, the MI Brewin Dolphin Voyager fund range and Sustainable MPS.
In line with the premium we place on personal relationships, we’ve built a network of 33 offices across the UK, Jersey and Republic of Ireland, staffed by qualified investment managers and financial planners. We are committed to the most exacting standards of client service, with long-term thinking and absolute focus on our clients’ needs at the core.
For more information, visit: www.brewin.co.uk
*as at 31st December 2021.
Disclaimer:
The value of investments can fall and you may get back less than you invested.Brewin Dolphin is authorised and regulated by the FCA (Financial Services Register reference number 124444)