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The ESG sectors tipped by the experts to thrive in 2023

08 December 2022

Janus Henderson anticipates an investment boom in sustainable equities, but which areas are the most attractive?

By Matteo Anelli,

Reporter, Trustnet

The next economic cycle will be driven by a green industrial revolution, as governments turn to a clean and digital economy to tackle the problems of the developed world, according to Janus Henderson Investors.

Looking out into 2023, the investment house said that the energy crisis will continue to be a topic of focus in the new year, but technology will play an ever more important role in mitigating energy inflation by offering cheaper alternatives and reducing dependence on the physical economy.

As policymakers have made clear that clean energy is key to meeting energy security needs and already invested billions of pounds in the energy transition, Hamish Chamberlayne, head of sustainable global equities at Janus Henderson Investors, expects the industries surrounding clean energy to be a key focus going ahead.

“As well as being integral to energy security, renewables are much cheaper than many other power generation technologies. In fact, today they are the cheapest source of energy for two-thirds of the global population, making up 75% of global GDP,” he said.

“Recent political instability and supply chain disruption have laid bare the fragility of the traditional global economic model, making the case for an improved, sustainable economy even more pronounced. As a result, we anticipate a capital investment boom on the horizon.”

Chamberlayne highlighted electric vehicles (EV), the adoption of which has more than tripled in the three years up to 2021 in Europe alone, as a key theme in the years ahead.

“This is echoed by global EV investment, which soared by 77% to $273bn in 2021. In stark contrast, global internal combustion engine production peaked in 2017. As a result, we expect demand for transportation fuels, which represent around 60% of oil demand, will begin to taper in the second half of the coming decade,” the manager said.

“Over the coming decade, we forecast more than 50% of all automobile production will shift to electric. Along with EVs, we will see an uptick in innovation in all aspects of electrification, including buildings and industry.”

But Chamberlayne’s isn’t a lone voice. David Jane, multi-asset manager at Premier Miton, said that the investment case for renewables has been “fairly consistent, and in fact may have become stronger over time”.

He particularly recommended utilities for their defensive characteristics, which are useful during ‘risk -off’ periods when markets are concerned about economic activity, and renewable equipment suppliers and electricity storage, which provide a useful complement to the growth characteristics of the more high-tech areas or the defensive characteristics of the utilities.

“Recently, it has become clear that companies further up the supply chain have a role to play. Electricity storage requires huge amounts of minerals such as lithium and cobalt. Wind farms and solar arrays require copper, plastics, steel, and other minerals such as rare earths,” he said.

“All of these areas have not only been ignored, in many cases they have been actively discouraged over recent years as not being green enough.”

The wealth management industry is also highly interested in the energy transition, as Hargreaves Lansdown environmental, social and governance (ESG) analyst Tara Clee and passive investment analyst Alexander Watkins pointed out.

They said a recent thematic investing report by HanETF found that nine wealth managers out of 10 would increase their allocation to clean energy over the next 12 months.

One area receiving increased attention according to Hargreaves analysts is nuclear power, with just under 90% of managers having recently invested in nuclear energy and uranium-focused funds.

“It is generally agreed that nuclear will play a key part in transitioning away from fossil fuels, as this form of power has already reduced carbon dioxide emissions by nearly two years’ worth of global energy-related emissions. From next year it will be formally earmarked as a sustainable investment by the European Union,” they said.

There are several clean-energy Exchange Traded Funds (ETFs) that offer a diverse range of opportunities to access the market, Clee and Watkins said.

One of them is iShares II plc Global Clean Energy UCITS ETF, which, at £5.6bn, is the second most popular ETF based on Hargreaves Lansdown’s client holdings.

Among the sustainable investment funds that the platform highlights are Aegon Ethical EquityBNY Mellon Sustainable Real Return and EdenTree Responsible and Sustainable Managed.

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