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What is inflation, and is it impacting you?

Clim8 Team

19 October 2021 Investment Academy

inflation

Let’s start with the basics: What is inflation?

Inflation is the rate at which prices rise (thus reducing your ability to buy what you’re used to). If the cost of a £1 jar of jam rises by 5p, then jam inflation is 5%1 .

It applies to services too, like having your hair cut or popping to the dry cleaners. 

The market determines inflation, and in the past 18 months, COVID-19 changed our spending habits, e.g. from going less to the cinema to spending more on subscriptions like Netflix. 

You may not notice inflation levels from month to month, but in the long term, these price rises can have a significant impact on how much you can buy with your money.

It’s worth noting that inflation can be difficult to predict, even for the most knowledgeable economists. 

Central Banks have printed a lot of money to stimulate consumer demand, and a strategic decision is needed to keep the global economy afloat during the COVID-19 pandemic. Demand for goods and services has now strongly recovered, but the supply side now looks challenged, experiencing supply shortages (energy, labour). 

How is inflation impacting our energy supplies? 

On energy prices specifically, the lack of investments in fossil fuels over the last 24 months is impacting everyone’s finances. The shift to a decarbonised energy system would make our economies less dependent on energy price swings while paving the way for a sustainable world.

How is it measured?

The Office for National Statistics (ONS) keeps a record and a close eye on the prices of lots of everyday items such as toilet paper, bread, and milk2 .

This list of items is called a “basket of goods,” and it’s constantly updated. 

This list adapts and changes in alignment with what the spending trends are. For example, during 2020, our spending habits changed. We no longer needed gym memberships, and items like hand sanitiser, masks and smartwatches were added to the list. It also often ends up in the news, like the current fuel crisis, where we’ve seen the price of petrol climbing well above the recent ONS data. 

What is the inflation rate used for?

Inflation is used to inform a wide variety of decisions, like how much the price of pensions will rise or if the price of everyday items will rise. 

It’s keenly watched by economists too. They see inflation as a sign of what’s going on in the economy.

Why is everyone talking about inflation right now? 

In recent years we’ve not had to consider the impact of inflation as much as we did years ago. But since COVID-19, the global economy has taken a bit of a bumpy ride. This, hand in hand with the switching to renewable energy sources means we may be seeing more inflation fluctuations than before3 .

Is inflation on the rise? 

The short answer is yes. Before the pandemic hit, inflation in the UK was around 2%, which is a percentage that the Bank of England aims for and expects. 

But due to a mix of circumstances, such as Brexit, COVID-19, and a whole host of other events, the topline figures for inflation have been impacted significantly – most years, we expect a 1% increase per year, but in Aug 2021, we saw inflation spike to 3.2%4 .

It’s not fully clear if this rise is a trend (the new “normal”) or a temporary anomaly.

So, to conclude. Should we be worried?

It’s complex, so there’s no definitive answer yet. 

We asked our investment team for their take and if we should be concerned: 

“Central bankers and policymakers around the globe currently believe that the current acceleration in inflation is transient and will likely return to normality (which is around 2%) as we approach 2022. 

But there are many risks to this consensus, driven by a prolonged energy crisis, labour shortages, and rising food prices. We’re keeping an eye on this as we consider what’s next for the markets.”  

Be sure to follow us on social media and subscribe to our newsletter to keep up to date with our insights into the market. 

Sources

1. BBC

2. Office of National Statistics

3. Bloomberg Green

4 POLITICO

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G7 in Cornwall – white sands, blue ocean, and the green agenda

Clim8 Team

16 June 2021 Climate ChangeSustainable Investing

G7 and green agenda

by Bastien Dublanc, Investment Director @ Clim8 Invest

As I was travelling on the train back to Paris last Sunday, I was torn between my two passions – great tennis (what an epic final at Roland Garros!) and sustainable finance, with expert commentary around the G7 communique dominating my newsfeed. Trying to unpick what really matters in high-level policy papers is not always easy, but it is a crucial part of our role as asset managers. This allows us to validate our assumptions and get a sense of where regulators might shift their attention.  

Green finance

“We emphasise the need to green the global financial system so that financial decisions take climate considerations into account”. (G7)

At the heart of Clim8’s mission is building a truly sustainable investing model. We believe that trillions have to be directed towards green finance to ensure that we comply with the Paris agreement (limiting global warming by 1.5C above pre-industrial levels by 2100). 

The question is: Where do you start? Which solutions are practical enough to turn intentions into actions? And what tools are readily available to investors? 

Today, not much is clear. But a couple of initiatives that were highlighted in the G7’s communique are in my mind helpful in bringing mandatory disclosures to help investors assess companies on their non-financial merits.

Firstly, climate-related disclosure is taking centre stage. Financial and non-financial companies will have to disclose how they are positioned to address climate-related risks (governance oversight, strategy) and the metrics that support a more informed vision about the potential carbon risks. The UK is expected to become the first G7 country to implement mandatory climate-related disclosure.   

Secondly, but with far fewer details fleshed out, we’re pleased to see the G7 group endorsing the taskforce on natural disclosure (TNFD, created in 2020) to notably help investors to assess companies’ impact under the environmental and biodiversity angle. 

Standard and common reporting rules should help investors to better compare companies’ impact on multiple fronts and direct capital towards companies that allocate capital accordingly. But at Clim8, we haven’t waited for these rules to be implemented and we thrive on finding ways to measure companies’ impact, although we acknowledge this is far from a perfect science. 

What about climate? 

“To be credible, ambitions need to be supported by tangible actions in all sectors of our economies and societies. We will lead a technology-driven transition to Net Zero, supported by relevant policies [….] and prioritising the most urgent and polluting sectors and activities” (G7)

Sectors that were highlighted as priorities were energy generation and distribution, transport, heavy industry, homes and buildings, agriculture, forestry and other land use. 

At Clim8, our investment methodology focuses on these sectors, recognising that positive environmental impact comes from decarbonising them at a fast pace, and this should be a collective ambition. 

Highlighted sectors are no different from the International Energy Agency (IEA) net-zero research paper released earlier this year and which contains much more detail about the roadmap to net zero by 2050. Here are some of the key milestones for each of the sectors discussed that provide much greater clarity relative to the G7’s statement: 

  • Power: no new coal plants from 2021, 1GW of wind and solar capacity addition p.a to 2030 with coal phase out in advanced economies aimed at reaching net zero in the power sector by 2035.
  • Transport: 60% of car sales are electric by 2030, ICE ban in 2035, low carbon transportation fuels available for aviation and marine
  • Buildings: all new buildings are net zero carbon ready by 2030
  • Industry: 90% of by 2040, requiring an intense replacement cycle that is low carbon to happen between 2040 and 2050 (hydrogen development is instrumental in supporting this transition along with carbon capture and storage)
  • No new coal mines or oil fields will be developed from now on. 

Shifting to the pledges and numbers, G7 announced:

  • The end of “inefficient” fossil fuel subsidies in G7 countries. In 2015 and 2016, up to $100 billion annually were allocated via tax breaks, public finance and direct spending.    
  • A $100 billion public-private contribution every year up to 2025 to help developing economies to transition towards net zero 
  • A $2.8 billion fund to stop using coal and support transition
  • The launch of the $2 billion Climate Investment Fund that can attract in its first year up to $10 billion of financing
  • A $500 million fund to protect oceans and marine life

To put these numbers into perspective, we need, according to the IEA, $4 trillion of annual investments in clean energy alone to reach net zero. In a nutshell, we’re not there yet. 

Equally, countries might have kept their biggest initiatives for Glasgow (COP26, this November) to announce more granular targets and roadmaps to feel comfortable with the decarbonisation pathways of our economies (We hope…).

Accountability versus inevitable policy response

The leaders committed to the “green revolution” that would limit the rise in global temperatures to 1.5C – so far so good. They also promised to reach net-zero carbon emissions by 2050, halve emissions by 2030, and to conserve or protect at least 30% of land and oceans by 2030.

The most important word here is “promise”, however. There will be undoubtedly new net-zero pledges and targets communicated along COP26. But what if current world leaders and business leaders fail to deliver by 2025? 2030? There will be forceful, abrupt and disorderly measures aimed at rectifying our carbon emissions trajectory. And investors need to be ready for that. A task force backed by the UN – the UN Policy Response Initiative – aims at helping asset managers to anticipate what policies might come into force and how this could impact portfolios. 

At Clim8, we try as much as possible to minimise these risks by following what abrupt measures could come and investing in sectors and industries that are the least likely to be exposed to these abrupt changes. 

With investing, your capital is at risk. For illustrative purposes only and does not constitute investment advice.

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Sustainable Investing Guide: Suggestions for investing without compromise

Clim8 Team

23 April 2021 Investment AcademySustainable Investing

sustainable investing guide

Considering the extensive information and news flow published in 2020 about sustainable investing, you are probably wondering where to start. Sustainable investing can be an ‘alphabet soup’, with countless acronyms and jargon and you may also be wary of greenwashing. How can you put your money to work for the planet without compromising on returns? Vincent Gilles, our Chief Investment Officer offers his views on a sustainable investing guide to start you on your journey.

1. Eliminate the negative

Ask yourself the following questions: what do you not want to invest in? What does not align with your values? Build an exclusion list specifying those sectors in which you do not want to invest. Oil and gas, airlines, tobacco and arms are regular contenders on sustainable investors’ lists.

2. Find the positive

Think about your values. What do you care about and wish to impact – social equality, clean water, recycling? Define where you most want your investments to make an impact and make a list to help you narrow down your choices.

3. What’s in a name?

Sustainability-focused funds are fairly easy to identify these days. Names tend to fit the purpose. Look out for titles that include words such as ‘clean’, ‘green’ or ‘sustainable’ as around 80% of ‘sustainability’-focused fund names will contain at least one of these words. However, as we point out in the Greenwashing guide, a name is just a starting point. In our view, you should take it with a pinch of salt until you can back it up with solid evidence.

4. Delve into the history

Not all sustainable funds are brand new and fresh to the market. This is a good thing, as they will have a track record of their past performance. Many funds have been around for years and some were simply rebadged as ‘green’ funds. This doesn’t necessarily mean they are misleading or greenwashing as ‘negative impact’ assets may have been sold off and replaced with ‘greener’ ones. After all, we are focusing on transitioning our economy.

However, some digging may be required to verify what activity has happened. Ask the fund management team or asset provider if the information is not available on their website.

5. Keep your eyes peeled for greenwashing

With everyone trying to jump on the ESG bandwagon and insufficient regulations yet in place, greenwashing in our view can seem rife. Misleading claims may  encourage investors with good intentions to put their money into funds that do not actually benefit our planet. Don’t fall into this trap –  read our Greenwashing guide

6. Misleading metrics

It’s one thing saying a fund is aligned to some Paris Agreement metric but how does the fund manager report its impact and adherence to those goals? Ultimately, you want to know what impact your money is having. Unfortunately, many current metrics cannot yet be verified with universally proven methodologies. The good news is that change is coming as accuracy improves with coherent reporting frameworks. Until then though stick to known measurable targets such as, for example, levels of carbon emissions. Expect to see those appear clearly in an impact report on any report on any ESG provider’s website.

7. Return with impact

Investing sustainably does not necessarily mean accepting lower returns. This is, in our view, an age-old misconception. Look for information on a provider’s website that will show you both financial and impact performance over longer periods of time. Always bear in mind that past performance is not a reliable indicator of future results.

8. Aligned to global principles

For example, look out for evidence that the provider has signed up to the United Nations’ Principles of Responsible Investment (PRI); guidelines instructing providers on how they can effectively incorporate ESG thinking into their investment philosophy and processes. Providers signed up to this code of conduct are certifying  that their firm has made a public commitment to responsibly invest. 

With investing, your capital is at risk. This information is for illustrative purposes only and does not constitute investment advice. Past performance is not a reliable indicator of future results.

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