There can be no doubt that the current situation and the conflict between Ukraine and Russia reinforces the issue of energy security and the need for economic independence of the West from the Russian superpower. The number one problem in this area is concern about gas and oil supplies. Linked to this is the fact that there is a growing motivation to expand alternative energy sources, the development of which has so far been driven mainly by the climate crisis.
Crisis resilience first and foremost
However, the war in Ukraine also highlights the fact that ESG criteria (environmental, social and governance) are an important factor in the future development of companies not only from a climate perspective but also from a social perspective in the way companies are managed. Indeed, the sanctions imposed on Russia will undoubtedly have a negative impact not only on the local economy, but also on Western countries, not to mention the rise in energy and food prices, which may again negatively affect investment assets across various segments. Fidelity's 2020 analysis showed that holders of the highest ESG ratings made an average profit of 0.4 percent during the first nine months of the year, while the lowest-rated group took a 23 percent write-down.* Thus, shares of ESG companies have shown greater resilience to market fluctuations in the post-pandemic period, and have fallen less in value than the market average. This factor may be key for investors in deciding the composition of their investment portfolio in the future.[1]
ESG investments are growing fast
According to Reuters, 2021 has been the most successful year for ESG investing. The global investment inflow into ESG funds totalled $649 billion through November of last year, giving them a 10 percent share of fund assets globally. By comparison, Refinitiv Lipper data shows that investment in these assets had been $542 billion in 2020 and "only" $285 billion in 2019. Of the total US$6.1 trillion in ESG funds, up to 59 per cent of the money is thought to be held in Europe, the Middle East and Africa, suggesting that investors in these regions are largely embracing the idea of ESG.
ESG has also been affected by the war
However, the uncertainty associated with the geopolitical tensions of today has also affected the ESG segment. While the MSCI World ESG Leaders Index was performing at 2.99 per cent in the first month of 2022, looking at the first quarter after the markets were hit by the slump caused by the outbreak of war, we can see that the index has seen a decline of 6.12 per cent.*[i] A similar trend can be observed for the MSCI World Index.
The coming months will show to what extent the geopolitical tensions and uncertainty that have affected the world will underpin the further development of ESG investments in 2022, as the consequences of sanctions against Russia, the imbalance in supply and demand, the uncertainty of supply combined with rising inflation and high energy prices, are causing a radical rethink not only of energy policy, but of security issues and investment patterns around the world. On the other hand, if investor confidence in this type of investment persists, the current correction may only be temporary.[2][ii]
Olívia Lacenová, Analyst of Wonderinterest trading Ltd.
[i] * Past performance is no guarantee of future results.
[1] Forward-looking statements are based on assumptions and current expectations, which may be inaccurate, or on the current economic environment, which may change. Such statements are not guarantees of future performance. They involve risks and other uncertainties that are difficult to predict. Results may differ materially from those expressed or implied by any forward-looking statements.
[2] Forward-looking statements are based on assumptions and current expectations, which may be inaccurate, or on the current economic environment, which may change. Such statements are not guarantees of future performance. They involve risks and other uncertainties that are difficult to predict. Results may differ materially from those expressed or implied by any forward-looking statements.
