Article 7 January, 2022

James Sym’s outlook: Will 2022 be the year the industry stops playing at ESG, and starts doing it properly?

James Sym, Head of European Equities at River and Mercantile, shares his outlook for 2022.

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I see three investment conclusions to be expressed in portfolios in 2022. First, two years after the economic nadir we are moving from early-cycle to mid-cycle. This means we are more cautious on early-cycle stocks and those most at risk from an inventory correction, which I view as a distinct possibility in H2 2022 as supply chains normalise. However, cyclicals in the broadest sense should be okay, especially where they are exposed to areas such as tourism which are still depressed through Covid policies.  Secondly, if inflation does prove to be more stubborn and capital more discriminating, which we think is likely, beware of excessive valuations – by which we mean the over 10x sales, 50x earnings variety. Thirdly, stick with the preeminent theme of this cycle, which is the opportunity afforded by decarbonisation. This is precisely where an investment boom - borderline mandated by governments in Europe, is most likely to take place.

“The atmosphere doesn’t care what your ESG rating is. It only cares about how much we, as a society, can reduce our collective total emissions. ”

Expanding on this final point, in my view 2022 will be remembered as the year that as an industry we stopped playing the ESG game and started doing it properly. This means no more shipping out portfolios which purport to be green simply because they happen to have low carbon emissions, or because a third party data provider says they are AAA, but rather, seriously thinking about how to allocate capital to businesses which are going to help lower carbon emissions in highly emitting activities. Why is this doing it properly? Simply put, because this is the only way in which we are going to support humanity’s goal of limiting global warming. The atmosphere doesn’t care what your ESG rating is. It only cares about how much we, as a society, can reduce our collective total emissions. It could be in transport, steel or cement production, or any capital-intensive industry but this is where we, as capital allocators, can make a real and tangible difference. For a contrarian, the opportunity set for stocks which can rerate and accelerate their growth – by making materially positive contributions in this way – is outstanding.

$6 trillion of Green Capex is needed globally per annum to 2030 to meet Net Zero, Infrastructure and Clean Water Goals

Source: IEA, OECD, McKinsey & Company, Goldman Sachs Global Investment Research. Data to 11 October 2021. Chart shows annual investment required, 2020-2030

 

 

 

The information in this article has been prepared and issued by River and Mercantile Asset Management LLP (trading as “River and Mercantile” and “River and Mercantile Asset Management”) registered in England and Wales under Company No. OC317647, with its registered office at 30 Coleman Street, London EC2R 5AL.
River and Mercantile Asset Management LLP is authorised and regulated by the Financial Conduct Authority (Firm Reference Number 453087) and is registered with the US Securities and Exchange Commission as an Investment Adviser under the Investment Advisers Act of 1940.
This article is directed at professional clients. The information in this article should not be relied on or form the basis of any investment decision.

ES R&M European Fund

Taking a pragmatic and contrarian investment approach to select attractive companies which offer value, and are also contributing positively to society 

R&M-18.1-MACRO-FIRST-RIGHT

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