Futurecast New Hampshire 2022

Previously published in Business New Hampshire Magazine.

We believe that New Hampshire investors are facing a turbulent future. The pandemic led to severe economic dislocations that were addressed by government spending and generous monetary policies. The resulting economic snap back was robust for many industries, leading to healthy corporate profits. And the combination of strong profit growth, available low-cost capital, and positive sentiment has driven the financial markets to new highs. But now, monetary policy winds are beginning to shift, and many investors are beginning to recognize the next challenge – building a sustainable economy that grows and addresses the climate and social issues facing our country.

The recent UN Intergovernmental Panel on Climate Change report was explicit about decarbonizing the global economy. It was adamant that global warming (greater than previously thought) has been unequivocally human-induced, conclusive on its causes (greenhouse gas, carbon dioxide and methane emissions), and detailed in its effects (too many to list, but think increased flooding, heatwaves, droughts, and frequent extreme or compound weather events). Additional studies indicate that the negative effects of climate change disproportionately fall on women, people of color, and lower income populations. The confluence of climate change and social challenges is inescapable, but not impossible to address. Successfully meeting these challenges can be driven by government policies and spending, significant private capital, and business ingenuity.

Global consultant McKinsey says meeting the challenges ahead requires a collaboration of the public and private sector, and targeting three goals: economic growth, inclusion, and sustainability. And while economic growth is at the center, inclusion and sustainability are inexplicably linked to that growth.

McKinsey posits it will require $3.5 trillion of global capital allocation every year until 2050 to address climate change. And in the US, increased annual spending of $275 billion to $450 billion in manufacturing alone is needed, creating a total of 15 million new jobs.

From a business perspective, McKinsey identifies six key challenges that will require capital: increasing productivity, reducing decarbonization costs, financing the cost of energy transition, reskilling 100 million workers, improving affordability and accessibility to housing, healthcare, and education, and supporting the most vulnerable segments of our population who are most impacted by climate change. From an investment perspective, these business challenges represent capital flows that are likely to generate meaningful returns. Depending on individual priorities, current investment opportunities include:

The UN report found that “there is a near-linear relationship between cumulative anthropogenic CO2 emissions and the global warming they cause” and “that reaching net zero anthropogenic emissions CO2 emissions is a requirement to stabilize human-induced global temperature increase.” Investing in a portfolio with a low-carbon footprint is one way an investor can contribute to a more positive emissions scenario. Many sustainable funds will either completely
avoid or have limited exposure to fossil fuel companies.

Decarbonization, electrification, and adoption of renewable energy have been, and should continue to be, powerful long-term trends. These trends provide attractive investment opportunities. Investors can tilt their portfolios towards companies providing solutions to this energy transition, thereby realizing the dual objective of environmental impact and potentially enhanced long-term returns.

Investors can realize environmental impact outside of equities. Many sustainable bond funds invest in green bonds or climate bonds. These fixed income instruments are designed and issued specifically to support climate-related or environmental projects. Examples include a sovereign bond issued to support a country’s sustainability targets or a corporate bond issued to fund that company’s transition to renewable energy.

For 2022, building a sustainable economy is likely to influence capital allocations and financial market returns. The Colony Group has the resources to help investors successfully allocate their capital for a sustainable future.