By Giles Coghlan, Chief Currency Analyst at HYCM.
Now that the much-publicised COP26 summit has come to a close, many traders, investors and advisers might have expected to see new commitments to net-zero trickling through to investment decisions and the financial markets.
However, this has not been the case – at least not in the short-term. Although the first day of trading on the London Stock Exchange after the summit saw some global mining giants taking losses, the FTSE 100 otherwise managed to remain relatively unscathed, closing the day at 7351.86, out up 3.95 points. In many ways, this was not a surprising result. Typically, the stock market is not responsive to long-term views – this is especially the case in the context of COP26, given that world leaders used rather tentative language when mapping out their plans to “phase down” (rather than “phasing out”) coal. Such language does not exactly signify a firm stance in the near future.
Consequently, investor sentiment appears cynical. Presently, just 45% investors consider sustainable investing to be important to them, according to recent research commissioned on behalf of HYCM. Evidently, traders and investors do not yet consider climate action as a pressing concern when drawing up their investment activities – the fact that only 19% of investors consider ESG investment as a savvy strategy only demonstrates this point further.
I would wager that it will take more than just cautious words to prompt investors to act. Here are some ideas about the future of COP26, and how these trends might change the investment landscape for traders, investors and advisers in the future.
Investors are cautious about green investment
One chief concern for investors will be the fact that the market is currently awash with companies leading with big claims about the purported environmental benefits of their products. Advisers should be aware that these concerns may be off-putting to investors – at present, more than a third (38%) of those surveyed by HYCM said that there is “too much hype” surrounding ESG investment.
This ‘greenwashing’ is a valid concern: there is a real risk that some companies may present a false impression about their ESG credentials in order to hop on the green bandwagon and attract an increasingly socially conscious band of investors. That said, investors should ensure that they are equally aware of the more authentic opportunities to invest sustainably.
Take, for example, the capital goods area: looking at investment from a growth standpoint, there will likely be plenty of opportunities to invest in the supply chain for climate solutions in the months and years to come. Likewise, it is probable that investment in ‘green’ technologies will be profitable in the future, while also contributing to the phasing out of carbon and creating new and novel climate solutions, so advisers and investors should keep this in mind.
At the moment, just 33% of the investors surveyed by HYCM stated that they plan to invest (or increase their investment) in green energy such as wind power, water stocks and solar energy over the next 12 months. Should any new environmental policies be implemented (activists are pushing for a global carbon tax, for example), these figures are likely to rise.
Green metals, such as copper, aluminium, nickel and lithium should also provide advisers and investors with some food for thought. These commodities could also see gains in line with increasing demand, as well as alternatives to traditional energy like oil.
Younger investors are ahead of the curve
Something else advisers and investors would do well to be aware of, is the fact that currently younger investors are leading the charge when it comes to sustainable investment. According to HYCM’s research, a significantly higher proportion of younger investors (age 18-34) said that this was important to them in comparison to the respondents at large – 60% and 45% respectively.
Broadly speaking, these findings chime with general market sentiment: research from MSCI, for example, has suggested that millennials have driven the growth of sustainable investing throughout the 2010s. According to figures, in 2020, investors pumped $51.1 billion into sustainable funds – a huge increase compared to the figure five years ago which came in at $5 billion, indicating that a more value-driven approach towards investing is already gaining traction amongst younger investors. With this in mind, larger corporations such as Microsoft, Tesla and Nike, will be keen to prove that they are industry leaders in the ESG arena.
Ultimately, now that the COP26 summit has drawn to a close, investors would be forgiven for feeling underwhelmed at its ability shake the stock market in the near term. Yet, it is important to recognise that the summit has signalled the beginning of trends which will have a substantial bearing on the actions of traders, investors, and advisers in the future, particular as changes to environmental policy come into effect.
