With seemingly endless regulations, concerns around so-called ‘transitory’ inflation and a desire to use assets to tackle climate change, the investment landscape can be confusing and tricky to navigate. So, to help you find your way, we’ve summarised the key trends that we believe should be top of the agenda for 2022.
The desire to use assets to tackle climate change has been bubbling under the surface for a good few years now, but COP26 brought it to the boil – putting the spotlight on investors and how they can use their capital to effect positive change.
As well as heightened media attention driving bottom-up sentiment in individual savers, we’ve also seen several new pieces of regulation, such as TCFD, enter the picture. Although these requirements are set to add a fair amount to already hefty workloads, we view them as a positive (and necessary) step for the industry.
What does this mean for you?
Corporate pension schemes between £1-5bn in size will need to dedicate considerable time and resources to meet the second wave of TCFD regulations. While these regulations haven’t yet reached the LGPS, we expect the LGPS will need to allocate similar levels of focus and resources in due course. You can find our TCFD guide here.
Regardless of the regulatory environment, members are increasingly expecting their assets to be managed in a way that considers the risks associated with climate change – and, beyond this, to use their money as a force for good. Fiduciaries of this capital will need to assess portfolios, consider sustainable investment solutions where appropriate (read our blog on climate solutions here) and hold asset managers accountable for their stewardship and engagement efforts.
Inflation has very much captured our attention over the past year. Covid has caused significant supply chain disruption, and we’ve witnessed the real-life effects of this, from the seemingly endless queues of container ships to the recent spike in energy prices. At the same time, pent-up demand has come to fruition, causing a stark supply-demand imbalance. As a result, UK inflation has surged to a 10-year high, with CPI ending 2021 at 4.2%.
What does this mean for you?
Unfortunately, we can’t accurately predict inflation – or its impact on markets, for that matter. However, we can say that investors should consider their portfolios carefully with this recent inflation volatility in mind. For corporate defined benefit pension schemes – is your hedging up to scratch? And for all investors – is your portfolio sufficiently diversified? See pages 12-14 of our recent publication for more on inflation and what it means for your assets.
Bank of England base rates hit an all-time low of 0.1% in 2020 but were increased to 0.25% in mid-December as the UK’s central bank looks to scale back monetary stimulus in an effort to limit inflation.
What does this mean for you?
With fears of more subdued equity returns in the face of rising rates, floating rate investments (i.e. those whose returns are linked to movements in interest rates), for example, might be an attractive addition to portfolios. For investors with flexibility within their liquidity budgets, assets such as private debt might be worth considering – impact private debt (i.e. lending to corporates whose asset or revenues positively contribute to specific and defined environmental or social objectives) could kill two trends with one stone!
While the environmental factor of ESG has been hogging the limelight of late – primarily due to the critical nature of the threat, increased regulations and enhanced data availability – we expect to see a greater focus on the ‘social’ factor this year, particularly off the back of the DWP’s 2021 ‘call for evidence on the social element of ESG investing’.
What does this mean for you?
Increased pressure to consider the social repercussions of your assets is likely – to manage both financial and reputational risks, such as those associated with poor supply chain labour standards, and to tap into the opportunities that characteristics such as having a diverse board present. We expect to see asset managers incorporating social factors alongside environmental factors into their engagement efforts.
With impact investing becoming increasingly popular, we’ve begun to extend our research into assets that present an opportunity to generate a positive social impact alongside financial returns, such as social housing.
Unless indicated, these are the views of the author and may differ from those of the firm.
