A green investment year in 2022

RIGHT now, the financial markets are characterized by a renewed focus on yet another flare-up of the Covid-19 pandemic, along with new restrictions, lockdowns, etc. This is completely natural, and quite inevitably, it also results in new speculations about global economic progress. The progress that since long, has been priced in the rates, but new uncertainty once again arises.

The actual return from an investment is, of course, central for an investor. Though it is an interesting question whether the recurring setbacks from the Covid-19 pandemic also override the “green” and sustainable development in the investment market in general, or will the demand for sustainable and green investments continue to increase, regardless of whether returns will be negative or positive in 2022?

Despite fears of the new Covid-19 Omicron variant, my expectation remains that the financial markets will stay reasonably stable in the coming year, and even offer some good opportunities here and there. Therefore, it is also my expectation that the green and sustainable focus on investments will continue, at least in some parts of the world.

A new EU (European Union) regulation technically affects all investment funds within the EU. This in itself has implications for many EU residents, but also for non-EU investors investing in EU investment funds. The EU would also try to influence the international investment community, through its new initiatives, such as with taxonomy.

Sustainable and green investments are suddenly virtually included in almost all investments, mutual investment funds, and other investment funds, in such an overwhelming degree that one could very quickly be led to believe that no gram of carbon dioxide (CO2) is now emitted at all from companies that sustainable funds have invested in. The challenge is that this is not the case, because many investment funds are wrapped as sustainable or green, as some elements in the chain have improved and sharpened its focus a bit on reducing the most polluting part of the production. At best, I assess it to be light green. In my opinion, the EU regulation is trying to deal with some areas where there is risk of cheating.

The first part of the taxonomy regulation enters into force on January 1. Here, the regulation fundamentally describes which economic activities contribute to meeting the EU’s environmental goals. In this process, investment funds hold a key function as investment funds now have to classify all their investments in accordance with the new regulation.

But, as mentioned, the European Union is also working with sustainability issues via the regulation. This means that an investment is sustainable if the company contributes to the achievement of one of the EU’s environmental objectives, without harming the other environmental objectives.

The environmental goals are defined quite broadly. The first goal is CO2 reduction and adaptation to climate change. Another is sustainable use and protection of water and marine resources. The third is about transition toward a circular economy by, for example, using waste reduction. Then, of course, there is the goal of preventing and combating pollution as well as protecting and restoring biodiversity and ecosystems.

The positive issue about the initiative is that the EU tries to work with definitions of what sustainability is, so a form of standard can be developed. However, it is also my assessment that quite a lot of companies could fit into the different categories. There is a risk that “sustainability” won’t be sharply defined. Therefore, my expectation is that there will still be investors who will demand more pronounced sustainable investments/investment funds.

The EU’s initiative has another interesting angle, as the EU is now also trying to work against the so-called “greenwashing.” In a broad sense, greenwashing could be claiming to be environmentally friendly, or tagging a product as environmentally friendly, without any evidence to support the claim. As a very concrete example, the EU examined a large number of e-commerce websites and found that approximately 50 percent of the products claiming to be “environmentally friendly” on their product descriptions are undocumented.

The same applies at company level, where for example, the clothing industry is under heavy criticism for greenwashing. A number of nongovernmental organizations have pointed this out for years, but I expect that the EU’s increased focus on this area will have an impact on so-called “green” investments. It emphasizes that an asset manager must have sufficiently good screening tools to be able to sort out companies that are greenwashers. As a consequence, I expect that in the short term, there will be fewer green companies to invest in, meaning the real “green investments” will become more genuine or greener, and the light green ones will slip out of the investment universe.

Peter Lundgreen is the founding chief executive officer of Lundgreen’s Capital. He is a professional investment advisor with over 30 years of experience and a power entrepreneur in investment and finance. Peter is an international columnist and speaker on topics about the global financial markets.