The ESG Investing Landscape in 2022: A Year of Two Halves

The year 2022 was a year of two halves for ESG investing. The first half was challenging, as the energy market disruption in early 2022, coupled with surging inflation and interest rate expectations, placed small and micro-cap stock valuations under pressure. Resources and energy stocks (underweight sectors in ethically screened funds) performed strongly, while ESG-focused funds lagged behind the broader market.

However, the second half of the year saw a more optimistic outlook for inflation and interest rates. Earnings-focused companies experienced a well-deserved upswing, and the impact on resource prices from the Ukraine war subsided. ESG fundamentals also came into focus, with investors increasingly looking for specialist knowledge in areas such as healthcare, IT, and utilities and renewables.

In addition, market inefficiencies in the ESG space began to attract attention. As ESG-focused funds are often benchmark unaware, markets weren’t pricing in the true value of these ESG-aligned companies, leading to opportunities for patient capital investors who were willing to take a long-term view.

Finally, the sustainable universe began to show its potential. Favourable structural trends, such as the transition to a low-carbon economy, are creating new investment opportunities in areas such as renewable energy and sustainable infrastructure. These trends are likely to continue to drive growth in the ESG space in the years to come.

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