ESG Feature – Greenflation
BNP Paribas, presents a different picture. “Greenflation is a transitory problem,” he says. “The long-term effect of the tran- sition to a greener, more sustainable economy that is less depending on fossil fuels is deflationary. Renewable energies over the longer term are going to be much more deflationary given they do not require ongoing fuel input costs. “The challenge in the short term as we transition to a future greener economy is there are inflationary pressures that could arise on inflation from higher fossil fuel prices and higher prices in commodity markets needed to support the energy transition like copper and lithium,” Bernhardt adds. “It will be particularly challenging if we do not invest adequately at the same time in building the green infrastructure necessary to replace fossil fuels. So it is important in the transition that all the people around the top tables responsible for this are aligned to that goal.”
Lower level Eric Nietsch, head of ESG Asia at Manulife Investment Man- agement, also has the short-term implications of greenflation in mind. “Inflation of any kind is a problem for investors, espe- cially fixed income investors. When it comes to greenflation, we have to think about whether the transition is contributing to inflation.” Here Nietsch cites some data that asserts a short-term green- flation picture, and a less stressful picture at that. “If we look at the value of commodities that are consumed globally, that has increased to $15trn (£12.2trn) from about $7tn (£5.7trn) during the past year, due to the Ukraine shock. That’s about 7% of global GDP.
“If we were to compare that to a $50 carbon price being applied across all commodities globally, Citi estimates that would be about $2.5trn (£2trn). So that potential level of greenflation is only a third of the level of inflation from the Russian/Ukraine shock. It is likley even less than that – because that $2.5trn can be spread over time compared to the inflationary pressures that have happened with a single year.” Such numbers suggest a greenflation situation is not as prob- lematic. “It is manageable. There is a time horizon aspect to it,” Nietsch says. “If we try to think about greenflation and take a step back to look at the bigger picture, the implications of reducing greenhouse gasses by 2050 are massive. “And many estimates state that it will require up to $5trn (£4trn) of investment annually – so it’s probably not an under- statement to say that this will reshape the global economy. “That could create inflationary pressure, especially during the next 10 years when there is the capex going into new infrastruc- ture,” Nietsch adds. “But once that infrastructure is built, it will probably be deflationary after about 2030.”
And any inflation in the meantime is something that could be kept under control, Nietsch says. “And even though it might be a little inflationary over the next decade, it is likely to be at a level that is pretty manageable. If we put that in the context of the annual investment that will be required for the transition, which creates a huge amount of investment opportunity for asset managers to participate in,” he says. Peter Mennie, global head of ESG integration at Manulife Investment Management, highlights a different angle to the greenflation scenario. “From a political perspective greenfla- tion is a challenge. It obviously is important if we are going to successfully address climate change to retain popular support for the risks that faces.”
We are undergoing the greatest inflationary storm of all times; we are talking about escalating inflation
with a bite. Désirée Lucchese, an ESG data and UN Sustainable Development Goals expert
And with the picture evolving over the coming years, Mennie admits that investment managers have a role to play in show- ing investors where the best places to invest will be, as green- flation takes some form of hold, even temporarily. “In the ESG investment spectrum you have everything from ESG integration all the way through to impact products,” Men- nie says. “The onus is on us as investment managers to be as transparent as we can about the products and when they are likely to outperform and underperform. So when the asset owner is making their asset allocation decisions they under- stand that backdrop and how, and what, will work,” he says.
Counterfactual case To the many potential problems presented by greenflation one should also present a counterfactual of what life would be like if we did not take the transition road, Nietsch says. “The World Economic Forum estimates that climate change could lower global GDP by 11% in a 2-degrees scenario by 2050 and up to
34 | portfolio institutional | July–August 2022 | issue 115
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