ESG Feature – Greenflation


ESG: GREENFLATION


Inflation has been the economic story of 2022. Leaping to a 40-year high has made food and energy unaffordable for many and put us on the verge of recession. But this could be a big- ger concern for institutional investors seeking to decarbonise their portfolios.


The invasion of Ukraine and economies still suffering from the impact of Covid have pushed up the cost of living, on top of that making the world greener and reducing inequality is another driver of inflation. In short, greening the world could potentially lead to what has become known as “greenflation”. This has implications for pension schemes and insurers who have committed to building sustainable portfolios amid a sup- ply-demand imbalance which has pushed up the price of assets with a high ESG profile.


32 | portfolio institutional | July–August 2022 | issue 115


Madeleine King, co-head of global investment grade research at Legal & General Investment Management (LGIM), believes that greenflation is a problem for which there is no short-term fix. “It is definitely an issue and there are many aspects to it,” she says. “Certain commodities being in short supply is not going to be alleviated anytime soon. Arguably, it is only going to get more difficult.”


And some aspects of greenflation stand at the door of investors themselves. “You have a certain pool of green assets to invest in and a growing pool of investors who want to invest in them. It is a basic supply and demand problem – with more people wanting to invest than there are assets to invest in,” King says. “So natu- rally, the prices of those assets have been driven up. The value of something considered purely green is arguably inflated.”


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